IMPORTANT  THINGS  TO  KNOW 
AND   DO 

1.  Read  the  introductory^  lesson  "The  Starting  Point  in 
Accountancy."  The  instructions  there  are  vital  to  your 
success. 


2. 
3. 


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8.  We  \va 
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factory 


9. 


10. 


11. 


12. 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

HENRY  RAND  HATFIELD 
MEMORIAL  COLLECTION 

PRESENTED  BY 

FRIENDS  IN  THE  ACCOUNTING 

PROFESSION 


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Upon  the  completion  of  the  first  ten  lessons  you  will  be 
furnished  a  neat  durable  file  for  your  returned  papers. 

Lay  out  a  program  of  study  and  follow  it.  One  lesson 
a  week  is  a  satisfactory  program  if  you  are  employed 
thru  the  day.  You  may  want  to  send  them  in  faster. 
That  is  all  right,  but  BE  REGULAR. 
Keep  these  suggestions  in  mind  and  begin  as  soon  as 
possible  on  the  introductory  lesson  "The  Starting  Point 
in  Accountancy" — then  take  up  Lesson  1. 

La  Salle  Extension  University 
Michigan  Ave.  at  Forty-first 
Chicago 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  «?2/ 
PROCEDURE 


Elements  of  Accounting  Practice 


THE  STARTING  POINT  IN 
ACCOUNTANCY 


ATHORO  STUDY  of  the  fundamental  principles  of 
accounting  ought  to  be  part  of  the  equipment  of 
every  business  mian.  The  fact  is  that  modern  accountancy 
enters  into  virtually  every  profession,  except  medicine 
and  one  or  t\^^o  others.  I  do  not  mean  that  accountancy 
need  be  or  should  be  the  ultimate  goal,  but  the  mastery 
of  accountancy  is  one  important  rung  in  the  ladder  lead- 
ing to  business  success. 

PERCY  H.  JOHNSTON 

Vice  President,  Chemical  National  Bank,  New  York 


LaSalle  Extension  University 

Chicago 


NHA-O 
(11-62) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Fc^mation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension-  University 


L3>3 


THE  STARTING  POINT  IN  ACCOUNTANCY 

Accounting — Its  Importance  to  Business.  It's  surprising  how  much 
better  one  can  work  at  a  thing  after  one  gets  the  big  vision  of  what  he  is 
accomplishing. 

Michael  Faraday  was  a  bookbinder's  apprentice,  with  apparently  no 
aim  in  the  world.  One  day,  while  binding  the  Encyclopedia  Britannica,  he 
saw  an  article  on  electricity  and  read  it.  That  half-hour  of  reading  gave 
him  a  vision  that  changed  his  whole  life.  He  later  became  an  international 
authority  on  electrical  science.    He  achieved  the  immortality  of  fame. 

Marshall  Field  showed  no  liking  for  business  when,  as  a  young  man, 
he  clerked  in  a  general  store  in  Massachusetts.  His  employer  said:  "He 
isn't  cut  out  for  a  merchant."  But  when  young  Field  came  to  Chicago 
and  saw  the  great  opportunities  for  success  which  that  thriving  city 
offered,  a  great  ambition  not  only  inspired  him  but  carried  him  on  to 
fortune  and  fame.  It  was  the  wider  vision  of  his  new  possibilities  that 
made  him  great. 

This  is  the  vision  of  accounting  we  want  you  to  get. 

All  Business  Dependent  upon  Accounting.  More  and  more  you  are 
bound  to  feel  that  the  success  of  all  modern  businesses,  irrespective  of 
whether  they  are  large  or  small,  depends  on  correct  control  thru  account- 
ing. When  you  watch  a  giant  locomotive  hauling  its  tons  of  freight; 
when  you  see  a  mighty  steamship  starting  out  for  some  port  on  the  other 
side  of  the  world;  when  you  stand  in  the  presence  of  roaring  blast  fur- 
naces, humming  factory  wheels*,  vast  retail  businesses,  banks,  insurance 
companies,  municipalities,  state  governments,  or  the  national  govern- 
ment itself,  you  can  truthfully  say,  "Correct  accounting  methods  con- 
tribute largely  to  the  success  of  all  these  activities." 

Everywhere  in  present-day  business  the  accountant  is  at  work.  The 
manufacturer  consults  him  about  his  costs.  The  merchant  comes  to  him 
for  price  information.  He  assists  the  credit  man  in  extending  credit,  and 
counsels  with  the  banker  and  the  capitalist  in  matters  of  finance. 

The  Accountant  in  Demand.  The  need  for  the  accountant  is  growing. 
Guesswork  methods  of  doing  business  no  longer  survive.  The  accountant 
of  to-day  is  an  apostle  of  efficiency.  He  discovers  leaks  and  wastes.  He 
raises  the  danger  signal  against  wrong  practices.  The  saving  of  untold 
millions  of  dollars  in  industry  is  one  of  the  tasks  to  which  accountants 
devote  their  efforts. 

So  whatever  the  work  in  which  you  make  use  of  your  accounting 
knowledge,  be  assured  that  you  will  be  able  to  do  that  work  more  efficiently, 
more  profitably,  because  you  have  had  thoro  training  in  Higher  Account- 
ancy. 

f5i51332S 


HOW  ACCOUNTING  PRACTICE  BEGAN 

Modern  accounting  practice  has  reached  a  high  state  of  development. 
While  it  may  seem  somewhat  complex  at  times,  its  basic  principles  are 
few  and  simple.  In  order  that  you  may  see  these  principles  apart  from  the 
complexity  of  present-day  methods,  we  will  go  back  a  few  hundred  years 
to  the  time  when  accounting  was  in  its  very  crude  beginnings. 

By  understanding  how  it  started  you  will  see  why  there  is  nothing 
mysterious  or  difficult  about  accounting.  Simple  accounting,  that  is,  book- 
keeping or  record  keeping,  started  in  a  very  natural  way  and  probably 
without  any  conscious  planning.  Business  just  drifted  into  various  methods 
of  simple  record  keeping. 

For  the  purpose  of  illustrating  this  simplicity,  imagine  yourself  living 
in  the  sixteenth  or  seventeenth  century.  You  have  never  "kept  books" — 
in  fact,  you  have  never  even  heard  of  such  a  thing.  You  decide  to  start 
in  business  as  a  shoemaker.  One  of  the  first  things  you  do  is  to  buy  some 
tanned  hide  from  a  neighbor  for  which  you  agree  to  pay  $2.00.  You  also 
buy  an  awl,  some  waxed  thread,  and  other  simple  hand  tools  and  mate- 
rials you  need  to  pursue  your  trade.    You  pay  $1.00  cash  for  them. 

How  Bookkeeping  Started.  As  your  business  expanded  you  continued 
to  buy,  not  only  more  tanned  hides  from  your  neighbor,  but  also  more 
materials,  such  as  pegs,  nails,  thread  and  the  like.  Some  of  these  pur- 
chases you  paid  for  at  the  time,  v/hile  the  others  you  agree  to  pay  for 
later.  Then,  too,  some  of  the  people  you  were  making  shoes  for  may  not 
have  paid  you  immediately  upon  delivery.  And  so  in  a  very  short  time 
you  found  yourself  entering  into  more  business  transactions  than  you 
could  rely  on  your  memory  to  keep  an  accurate  record  of. 

What  would  be  a  more  natural  thing  to  do  under  such  circumstances 
than  to  "jot  down"  somewhere,  either  on  a  piece  of  paper  or  on  the  v/all, 
a  memorandum  of  these  various  transactions.  As  soon  as  you  started 
making  these  memorandums  you  became  a  bookkeeper,  altlio  you  might 
not  have  thought  yourself  one. 

Bookkeeping  as  originally  developed  was,  therefore,  nothing  more  nor 
less  than  crude,  probably  unrelated,  memoranda  of  transactions  involving 
exchange  in  values;  it  was  merely  a  "jotting  down"  or  "chalking  up"  of 
little  business  deals  with  no  attempt  to  classify,  analyze,  or  even  debit  or 
credit. 

The  early  methods  of  bookkeeping  may  be  defined  as  a  simple,  day  by 
day  story  of  daily  business  happenings. 

Once  you  get  this  fact  clearly  in  mind,  the  v/hole  interesting  story  of 
modern  bookkeeping  and  accounting  v/ill  be  more  readily  understood, 
because  it  all  started  from  this  simple,  unclassified  jumble  of  unrelated 
notations  representing  simple  business  transactions.  The  modern  com- 
plete systems  of  bookkeeping  and  accounting  have  grown  out  of  these 
crude  beginnings.  Their  development  has  been  largely  a  matter  of  assem- 
bling and  classifying  items  into  separate  records  for  each  class. 

Introduction,  Page  2 


Original  Day  Book  a  Mere  Diary.  Out  of  these  crude  daily  jottings  by 
primitive  tradesmen  the  so-called  "day  book"  was  developed.  It  was  at 
first  simply  a  sheet  of  paper,  or  a  board,  or  such  writing  material  as  was 
available  for  continual  use.  Thus  all  transactions  came  to  be  recorded  in 
one  place.  The  day  book  in  its  early  stages  might  have  appeared  some- 
what as  in  Figure  1. 


(^^L^^     yi-e-t^^^    ^-^C-ct^^J<3    i3-*^->z5'~  If  jf  . 


Figure  1 

It  is  apparent  that  the  early  day  book  was  merely  a  diary  of  business 
transactions — no  money  columns,  no  debits,  no  credits — just  explanations 
of  simple,  daily  business  events  in  wliich  money  was  involved. 

The  Day  Book  with  Money  Columns.  The  most  important  reason  for 
keeping  these  records  was  to  keep  track  of  money  or  values  received  or 
expended,  or  to  be  received  or  expended.  The  most  natural  thing  for  our 
primitive  bookkeeper  to  do  was  to  place  the  figures  representing  the  money 
values  in  a  prominent  position,  so  that  he  might  pick  out  the  amounts 
easily  and  quickly.  This  prominent  position  might  have  been  to  the  left 
or  to  the  right  of  the  explanatory  section  of  the  entry.  Assuming  that 
the  figures  were  placed  to  the  right,  the  day  book  just  described  would 
have  appeared  as  in  Figure  2. 

This  is  an  im.provement  upon  the  first  "day  book."  We  can  clearly  see 
the  values  that  are  received,  to  be  received,  expended,  or  to  be  expended. 
Merely  looking  at  the  money  amounts,  however,  gives  us  no  clue  as  to  the 
nature  of  the  transaction.  Yet  we  may  rest  assured  that  the  maker  of 
such  a  day  book  would  have  been  vitally  interested  in  knowing  what  each 
item  represented— whether  it  meant  money  to  come  in,  money  received. 

Introduction,  Page  3 


money  to  be  paid  out,  or  money  already  paid  out.    He  would  naturally  feel 
the  need  of  knowing : 

1.  To  whom  he  owed  money 

2.  From  whom  money  was  due 

3.  If  money  paid  out  reduced  his  debts 

4.  If  money  received  decreased  amounts  due  him 

Such  questions  would  come  to  the  mind  of  anyone  dealing  in  any  kind 
of  values,  and  would  naturally  result  in  some  simple  subdivisions  of  trans- 
actions so  that  these  questions  would  be  fully  answered.  Such  subdivisions 
were  made  even  in  the  early  days,  the  result  being  the  creation  of  other 
records  subsidiary  to  the  day  book,  altho  the  day  book  continued  to  be 
used  as  a  daily  record  of  business  transactions. 


jJ  <X^*^<l-<  <XA<f       -"O 


Figure  2 

Separate  Records  for  Cash  Transactions.  Every  business  man  is  inter- 
ested in  knowing  what  cash  funds  are  on  hand.  Without  such  knowl- 
edge not  even  the  simplest  business  could  be  conducted  successfully.  What 
is  more  natural,  then,  than  to  keep  a  separate  record  of  all  cash  received 
and  cash  paid  out?  As  a  result,  we  have  the  cash  book— one  page,  or  one 
side,  used  to  record  the  cash  received;  the  other  side  used  to  enter  the 
cash  disbursed.  That  the  cash  received  was  placed  on  the  left  side  and 
the  cash  disbursed  on  the  right  was  probably  accidental,  because  the  early 

Introduction,  Page  A 


bookkeeper  knew  nothing  about  "debit"  (left  side  entry)  or  "credit"  (right 
side  entry).  These  terms  did  not  come  into  common  use  until  after  it  had 
become  the  practice  to  use  both  sides.  The  early  bookkeeper  was  inter- 
ested mainly  in  knowing  what  he  took  in  and  what  he  gave  out.  Naturally 
he  had  to  keep  these  transactions  separate. 

How  the  Cash  Book  Was  Developed.  The  cash  book  did  not  take  the 
place  of  the  day  book.  The  items  it  contained  were  posted — transferred — 
from  the  day  book.  The  bookkeeper  simply  picked  out  the  cash  entries 
from  his  day  book  and  copied  them  in  the  cash  book.  The  primitive  cash 
book,  like  the  first  day  book,  v>^as  probably  no  more  than  a  simple  memo- 
randum book,  presumably  without  money  columns,  because  in  those  days 
paper  and  printing  were  expensive.  So  the  early  cash  book  probably  re- 
sembled Figure  3. 


"i 


Figure  3 


As  stated  before,  altho  the  cash  book  recorded  separately  all  cash 
transactions,  they  were  also  entered  first  in  the  day  book.  This  dupHca- 
tion  of  work  continued  for  a  long  time,  and  onlj'  when  the  cash  dealings 
became  too  heavy  was  the  extra  work  realized  and  eliminated.  If  a  cash 
book  recorded  all  cash  transactions,  then  it  was  merely  a  duplication  of 
effort  to  enter  the  same  transactions  in  another  book.  Therefore  it  came 
about  that  all  cash  items  were  entered  directly  in  the  cash  book.  The  day 
book  took  care  of  all  other  business  transactions — those  which  had  to  do 
with  future  cash  settlements — that  is,  with  sales  on  time  and  purchases 
on  time.  In  its  early  stages,  however,  the  day  book  was  not  a  journal  (a 
book  you  will  learn  more  of  later)  as  we  know  it  to-day,because  there 
were  no  debit  and  credit  columns  in  the  day  book. 

The  Primitive  Ledger.     In  all  probability  the  ledger — the  book  that 
contains  the  accounts  with  individuals — grew  first  out  of  the  day  book;  it 
did  not  develop  into  the  ledger  as  we  know  it  to-day,  but  into  a  memo- 
randum book  which  merely  indicated  that  a  credit  sale  or  a  credit  pur- 
Introduction,  Page  5 


chase  had  been  made.  The  early  ledger,  therefore,  contained  only  accounts 
with  persons.  Since  a  sale  on  credit  would  finally  yield  cash,  and  a  pur- 
chase on  credit  would  result  in  a  cash  payment,  the  value  of  goods  sold 
to  an  individual  would  logically  be  recorded  on  the  left  side  of  the  ledger, 
and  the  purchase  from  an  individual  on  the  right  side  of  the  book.  Such 
an  early  ledger  might  have  been  something  like  Figure  4. 


Figure  4 

As  the  amounts  due  to  creditors  and  debtors  increased,  it  was  natural 
to  place  all  debtors'  names  in  one  book  and  all  creditors'  names  in  another. 
It  was  in  this  way  that  the  Accounts  Receivable  and  the  Accounts  Payable 
ledgers  originated — terms  which  you  will  fully  understand  later. 

"Debit"  and  "Credit"  Unknown  in  Primitive  Bookkeeping.  The  "debit" 
and  "credit"  feature  of  modern  bookkeeping  had  not  yet  appeared.  There 
was  only  a  single  entry,  either  in  the  cash  book  for  cash  transactions  or 
in  the  day  book  for  other  than  cash  transactions.  The  accounts  with  in- 
dividuals in  the  so-called  "ledgers"  were  just  ordinary  memoranda  under 
each  name,  of  amounts  due  or  owing,  copied  for  convenience  from  the  daj'' 
book.  Therefore,  whenever  an  account  was  paid  the  ledger  account  would 
either  be  scratched  or  canceled  or  the  word  "paid"  and  the  date  it  was 
paid  written  across  it,  as  in  Figure  5. 


^ 


'wg^  JO 


Figure  5 

When  an  amount  due  a  creditor  was  paid,  it  was  doubtless  marked  in 

the  same  way. 

Starting  Point  of  Double  Entry.  We  have  noticed  that  all  cash  received 
and  all  cash  to  be  received  has  been  placed  on  the  left-hand  side  of  a  book 
(the  latter  sometimes  in  a  separate  book  v/here  only  amounts  to  be  received 
were  entered),  and  that  moneys  disbursed  or  to  be  disbursed  have  been 
placed  on  the  right-hand  side.  From  this  point,  the  step  to  double  entry 
was  a  simple  one. 

Let  us  see  how  double  entry  (the  entry  of  both  a  debit  item  and  a 
credit  item  for  each  transaction)   came  about.     To  illustrate:    take  an 

Introduction,  Page  6 


account  receivable  which  represents  cash  to  be  received.  Suppose  that 
money  is  received  in  part  payment  of  this  account.  What,  then,  would 
be  the  effect  of  such  receipt?  A  cash  disbursement,  representing  money 
actually  paid  out,  of  course,  reduces  the  cash  account,  and  is  entered  on 
the  right  of  the  cash  book  or  Cash  Account,  thus  denoting  a  reduction  of 
cash.  In  the  same  manner,  money  received  would  naturally,  as  in  the 
case  of  cash  disbursed,  be  placed  on  the  right-hand  side  (or  page)  of  the 
Account  Receivable,  thus  also  denoting  a  reduction. 

Primitive  Method  of  Posting.  There  may  not  have  been  a  conscious 
posting  process  from  the  cash  book  to  the  ledger  at  first,  but  certainly  il 
cash  received  was  entered  in  the  cash  book  on  the  left-hand  side  anc 
appeared  again  on  the  right-hand  side  of  an  account  to  be  collected,  th( 
step  to  an  actual  posting  or  transferring  process  depended  only  upon  the 
number  of  cash  items.  When  these  increased  sufficiently  to  prevent  con- 
venient entry  in  both  the  cash  book  and  the  individual  account  at  the  same 
time,  the  transferring  of  the  cash  items  to  the  individual  accounts  prob 
ably  occurred  at  the  end  of  a  day.  And  in  order  that  the  bookkeepei 
might  know  that  all  cash  received  from  a  customer  was  also  properly 
entered  against  his  account,  he  would  naturally  put  some  kind  of  chect 
mark  in  his  cash  book  so  that  he  would  know  that  all  the  items  were 
properly  disposed  of. 

The  Meaning  of  Debit  and  Credit.  Since  cash  paid  out  to  a  creditoi 
would  naturally  reduce  the  cash  to  be  paid  out,  it  would  be  right  to  place 
any  such  payments  to  the  left  of  the  amounts  owing  to  individuals.  At 
this  stage  of  bookkeeping  we  can  readily  see  why  these  terms  were  latei 
used.  "Debit"  means  to  charge,  and  "credit"  comes  from  the  Latin  verb 
"credo"  (I  trust) ;  in  other  words,  if  any  one  becomes  indebted  to  us,  we 
charge;  when  he  pays,  our  confidence  in  that  individual  is  increased  be- 
cause he  proves  that  the  trust  was  warranted.  Again  we  credit  parties 
to  whom  we  owe  money  because  they  trust  us,  and  that  obligation  is  elimi- 
nated when  we  pay. 

The  Double  Entry  Principle.  Sim.ple  accounting  or  record  keeping  is 
as  old  as  business  itself.  As  far  back  as  recorded  history  goes  it  is  knov/n 
that  accounts  were  kept  in  one  form  or  another. 

It  is  only  in  comparatively  modern  times  that  the  double  entry  prin- 
ciple— the  entry  of  a  debit  for  every  credit — became  the  recognized  foun- 
dation of  accounting.  To  the  Italians  belong  the  credit  for,  discovering 
and  developing  this  principle. 

We  have  referred  to  the  double  entry  principle  but  very  briefly  on  page 
6.  A  complete  and  very  interesting  discussion  of  this  feature  of  modern 
accounting,  showing  you  just  what  it  means  and  how  to  use  it,  will  be 
given  in  a  later  lesson. 

You  will  also  see,  as  you  read  thru  the  lessons  that  are  to  follow,  how 
the  primitive  records  about  which  you  have  just  been  reading  grew  into 
the  more  elaborate  and  highly  standardized  forms  used  in  modern  account- 
ing practice.     You  will  find  it  easier  to  understand  the  various  books  of 

Introduction,  Page  7 


modern  accounting  if  you  will  bear  in  mind  that  fundamentally  they  are 
simply  developments  and  refinements  of  these  perfectly  simple  and  nat- 
ural foundations. 

Modern  Accounting  Practice.  Modern  accounting  practice  rests  upon 
the  basis  of  such  simple  fundamental  principles  as  have  been  outlined  to 
you  here.  The  application  of  these  principles  to  meet  the  requirements 
of  modern  business  has  necessitated  the  introduction  of  many  adaptations 
and  refinements  with  which  the  accountant  of  to-day  must  be  familiar.  He 
must  not  only  know  the  principles  of  debit  and  credit,  how  to  post  to  the 
ledger  and  many  other  accounting  operations,  but  he  must  also  be  trained 
in  the  preparation  of  correct  statements,  must  know  how  to  make  investi- 
gations into  the  adequacy  or  inadequacy  of  accounting  systems;  he  must 
know  how  to  determine  costs,  and  to  some  extent  he  must  know  the  prin- 
ciples of  business  organization  in  order  to  suggest  improvements  in  the 
organizing  and  managing  of  modern  business  enterprises. 

The  modern  accountant  must  also  know  business  law,  because  legal 
rights  or  duties  involve  money  or  credit  and  are  at  the  basis  of  most 
business  transactions. 

In  order  to  meet  most  effectively  these  rigid  requirements,  the  account- 
ant of  to-day  must  of  necessity  not  only  be  well  informed  on  accounting 
principles  but  he  must  also  know  how  to  make  the  most  use  of  his  infor- 
mation. He  must  be  thoroly  trained.  He  must  know  both  the  theory  and 
the  practice  of  accountancy.  He  should  have  a  broad  business  outlook 
and,  if  he  is  to  make  a  real  success  of  his  work,  be  highly  specialized  along 
certain  lines. 

HOW  THE  LA  SALLE  HIGHER  ACCOUNTANCY  COURSE  MEETS 

THIS  NEED 

The  course  of  training  which  you  have  now  definitely  undertaken 
gives  you  first  of  all  a  complete  training  in  elementary  and  advanced  prin- 
ciples of  accounting  in  the  first  two  sections : 

Section  I — Elements  of  Accounting  Practice 
Section  II — Principles  of  Accounting  Practice 

The  first  section  begins  with  the  very  simplest  of  bookkeeping  and 
accounting  methods.  Even  tho  you  know  nothing  whatever  of  bookkeep- 
ing, these  methods  will  be  so  clearly  outlined  and  explained  that  you  will 
grasp  them  very  readily.  Thruout  this  section  you  will  familiarize  your- 
self with  the  "how"  of  doing  things  in  bookkeeping  and  elementary 
accounting. 

In  the  second  section  the  work  will  be  more  advanced  and  will  deal 
especially  with  the  "why,"  with  the  principles,  or  as  it  is  sometimes  put, 
with  the  theory  of  the  subject. 

Specialized  Accounting  Training.  Sections  I  and  II  give  you  a  working 
knowledge  of  general  accounting.    You  are  then   ready   to   apply  this 

Introduction,  Page  8 


knowledge  to  the  special  accounting  problems  in  the  next  three  sections 
which  are  as  follows: 

Section  III — Cost  Accounting  Procedure 

Section  IV — Auditing  Procedure 

Section  V — Accounting  Systems  and  their  Installation 

In  Section  III  you  will  be  taught  the  principles  of  cost  accounting  and 
trained  in  the  actual  work  done  in  cost  departments.  Section  IV  explains 
the  work  of  the  public  auditor  and  trains  you  to  do  the  work  of  a  staff 
man  in  public  accounting.  After  you  have  completed  Section  V  you  will 
be  able  to  judge  the  value  of  existing  accounting  systems  and  to  work  out 
improvements  or  install  entirely  new  systems  along  the  most  modern  lines. 

SPECIAL  TRAINING  IN  BUSINESS  LAW  AND  ORGANIZATION 

The  next  two  sections  of  the  course  are: 

Section  VI — Business  Law 
Section  VII — Business  Organization 

Every  accountant  must  know  at  least  the  elementary  legal  problems 
of  business.  Entries  that  he  will  make  on  the  books,  often  the  statements 
he  must  prepare  for  a  client  or  for  his  own  business,  will  be  affected  by 
legal  points  involved  in  interpreting  contracts,  partnership  agreements, 
the  by-laws  of  corporations,  or  other  forms  or  legal  documents. 

Special  Lectures  on  Business  Subjects.  A  knowledge  of  general  busi- 
ness problems  and  practice  is  indispensable  to  every  accountant.  For  that 
reason  you  will,  from  time  to  time,  receive  lectures  on  general  business 
subjects  which  you  will  find  helpful  as  well  as  interesting.  These  lectures 
are  in  booklet  form  and  cover  such  subjects  as: 

Graphic  Charts  for  the  Business  Man 

The  Regulation  of  Corporations 

The  Detection  of  Fraud 

The  Employment  Department  and  Employe  Relations 

Analysis  of  Financial  Statements 

You  will  receive  more  than  twenty  of  these  lectures  by  authors  who 
are  leaders  in  their  respective  fields,  and  whose  work  is  authoritative. 
They  will  be  of  great  value  in  familiarizing  you  with  modern  business 
practice,  which,  of  course,  is  very  essential  to  your  success. 

OTHER  SPECIAL  FEATURES  OF  THE  COURSE 

The  Consultation  Privilege.  It  is  important  that  you  keep  in  mind 
your  consultation  privilege.  We  want  you  to  make  use  of  it  whenever 
you  feel  that  the  instructors  of  the  Higher  Accountancy  Department  or 
any  of  the  experts  of  other  departments  of  the  University  can  be  of 
service  to  you. 

Special  C.  P.  A.  Training.  Besides  your  consultation  privilege  you  will 
be  entitled  to  receive  upon  graduation,  not  only  your  diploma  but  also  a 

Introduction,  Page  9 


special  training  course  which  is  in  the  nature  of  a  postgraduate  course  for 
those  planning  to  take  the  C.P.A.  examination.  You  are  also  entitled  upon 
graduation  to  a  special  elective  treatise  on  accounting  for  any  particular 
line  of  business  in  which  you  may  be  especially  interested. 

LaSalle  Service.  The  instruction  service  and  the  consultation  privilege 
are  the  real  personal  element  of  LaSalle  service.  This  service  is  made  to 
fit  your  individual  requirements  and  is  rendered  to  you  personally  and 
direct  by  your  instructors  and  the  consultation  staff  of  LaSalle  Extension 

University. 

Take  advantage  of  this  service  whenever  any  part  of  your  work  is  not 
perfectly  clear.  Master  each  lesson  as  you  go;  do  not  allow  an  accumula- 
tion of  points  that  you  are  not  clear  on,  to  pile  up  on  you — this  will  slow 
up  j^our  progress  more  than  you  may  realize.  So  clear  the  way  as  you  go. 
Never  be  content  to  pass  a  point  you  fail  to  understand — it  may  be  vital. 

THE  STARTING  POINT 

Your  work  will  begin  with  "The  Balance  Sheet"  in  Lesson  1,  and  "The 
Profit  and  Loss  Statement/'  Lesson  2.  These  are  important  business 
statements  which  every  business  man  wants  to  see.  The  man  in  business 
who  employs  an  accountant  needs  no  detailed  knowledge  of  accounting 
operations  to  understand  these  statements  and  their  uses.  We  want  you 
to  interpret  them  as  a  business  man  would  and  appreciate  clearly  their 
immense  importance  to  successful  business  management. 

HOW  TO  PROCEED  WITH  THE  WORK 

Assignment.  You  are  now  ready  to  attack  the  lessons  vigorously. 
Give  Lesson  1  a  thoro  reading,  aiming  to  get  not  only  a  detailed  knowl- 
edge, but  also  a  broad  survey  of  the  subject  treated.  Fix  in  mind  the 
central  idea  in  each  paragraph. 

After  you  have  read  carefully  this  assignment — and  fully  understand 
all  points  presented — prepare  solutions  to  the  problems,  following  the 
instructions  given. 

These  problems  are  practical  business  cases;  they  involve  questions 
which  the  man  in  business  or  his  accountant  must  meet  and  master.  In 
working  with  them,  you  are  equipping  yourself  in  the  best  possible  way  to 
meet  successfully  other  problems  in  business.  You  are  obtaining  PRAC- 
TICAL EXPERIENCE  of  the  best  possible  kind  in  your  chosen  work.  You 
are  gaining  an  experience  which  you  will  often  be  able  to  use  and  capitalize 
in  your  daily  work — an  experience  which  also  fits  you  for  the  bigger 
job  ahead.  You  are  getting  this  experience,  this  ability  to  apply  your 
knowledge,  under  the  helpful  guidance  of  the  accountants  on  our  staff. 

Practical  Solutions.  With  the  return  of  your  lessons,  the  University 
will  send  you  practical  solutions  for  the  problems.  These  solutions  have 
been  carefully  prepared  by  our  expert  accountants.  They  will  show  you 
the  best  form  to  follow  in  preparing  subsequent  work.    In  each  case,  these 

Introduction,  Page  10 


solutions  will  prove  a  most  valuable  guide.  Carefully  studied  and  followed 
they  will  be  among  the  most  effective  aids  in  your  mastery  of  Higher 
Accountancy  and  your  advancement  in  the  business  world. 

Read  carefully  the  instructions  given  you  on  the  inside  page  of  your 
binder  cover.  These  are  important  and  will  be  found  valuable  if  carefully 
followed. 

Your  successful  training  now  depends  largely  upon  YOURSELF.  Send 
in  your  written  work  and  consult  with  your  instructors.  They  will  give 
you  sympathetic  and  helpful  suggestions.  Depend  upon  them  and  consult 
them  frequently.  And  keep  in  mind  always  that  there  is  nothing  you  can- 
not have — no  success  is  going  to  be  denied  you — if  you  but  have  the  GRIT, 
the  DETERMINATION,  and  the  PERSISTENCE  to  win. 

Assignment  1  follows.  May  we  have  your  written  work  in  a  few  days, 
so  that  we  can  tell  just  how  you  are  getting  along? 


"I  don't  think  much  of  a  man  who  is 
not  wiser  to-day  than  he  was  yesterday." 

— Abraham  Lincoln. 


introduction,  Page  11 


Higher  Accountancy 

Ol  'P 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  1 

THE  BALANCE  SHEET 


QUOTING  from   the   Journal  of  Accountancy,    the 
,  authoritative  organ  of  the  professional  accountants 
of  the  United  States : 

*  *  *  the  accounting  profession  is  probably  the  best  paid  in  the 
world.  If  there  be  a  profession  in  which  the  average  compensation 
is  higher,  it  is  not  known  to  us. 

There  is  need  for  accountants.  There  is  ample  compensation  for 
accountants.  There  is  no  prospect  that  the  supply  will  overtake  the 
demand  within  the  lifetime  of  even  the  youngest  of  us. 


LaSalle  Extension  University 

Chicago 


NHA-I 

(1-33) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Deprecl\tion  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Oper.\tion 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  E.xtension  University 
Printed  in  the  U.  S.  A. 


THE  BALANCE  SHEET 

A  STATEMENT  OF  THE  FINANCIAL  CONDITION  OF  A  BUSINESS 

Wherever  you  are  and  whatever  you  may  be  doing,  you  are  in  direct 
contact  with  business.    Look  about  and  see  if  this  is  not  true. 

You  are  daily  giving  up  values  that  you  possess  for  other  values  that 
you  desire  to  obtain.  When  you  go  into  debt,  you  receive  either  com- 
modities or  services  in  return.  When  you  write  a  check  or  issue  a  promis- 
sory note,  you  are  doing  business.  When  you  agree  to  work  for  your 
employer,  you  promise  to  give  him  your  services,  and  he  in  turn  assures 
you  a  fixed  amount  of  income.  He  is  buying,  and  you  are  selling.  This 
we  call  business,  because  both  of  you  enter  into  the  agreement  primarily 
to  make  profit.  Business  is  all  about  you.  The  newspapers  and  magazines 
bring  the  news  of  business  right  into  your  home. 

No  one  is  closer  to  business  than  you  are.  No  one,  therefore,  has  a 
better  opportunity  to  study  it. 

As  you  begin  this  training  in  Higher  Accountancy,  start  with  us  right 
where  you  are.  Your  intimate  relation  with  business  and  your  general 
knowledge  of  business  transactions  will  make  it  easy  for  you  to  begin  this 
study.  As  you  proceed,  you  will  learn,  step  by  step,  how  to  record  and 
analyze  business  transactions.  This  is  primarily  the  work  of  the  book- 
keeper and  the  accountant. 

It  is  practically  impossible  to  draw  a  sharp  dividing  line  between  the 
work  of  the  bookkeeper  and  the  duties  of  the  accountant.  Very  often  the 
bookkeeper  must  also  act  as  the  accountant,  but  where  the  business  is 
large  enough,  the  two  fields  are  definitely  separated. 

What  the  Bookkeeper  Does.  The  bookkeeper  records  the  transactions 
that  affect  the  business.  He  keeps  the  books.  He  also  tests  the  correctness 
of  his  work  frequently,  and  sometimes  he  is  required  to  make  out  the 
financial  statements. 

What  the  Accountant  Does.  The  accountant  designs  the  records  in 
which  the  bookkeeper  makes  his  entries.  He  installs  new  systems  of 
accounts,  or  improves  those  already  in  use.  He  audits  the  records.  He 
makes  periodic  summaries  from  the  ledger  in  order  that  the  proprietor 
may  know  the  financial  condition  of  the  business.  He  also  makes  monthly 
reports  of  the  progress  of  the  business.  From  the  data  collected  by  the 
bookkeeper,  the  accountant  determines  the  cost  of  manufacturing  and  the 
cost  of  operation.  He  is  expected  to  show  departmental  costs  a,nd  profits. 
He  should  discover  the  leaks  in  a  business,  and  he  is  expected  to  give  advice 
on  how  the  profits  can  be  increased. 

Briefly  stated,  bookkeeping  is  the  recording  of  business  transactions; 
accounting  consists  of  an  analysis  and  interpretation  of  these  records. 


Accounting  as  an  Aid  to  Business.  Modern  accounting  is  an  essential 
and  practical  aid  to  business,  not  only  because  it  provides  for  an  accurate 
record  of  every  transaction,  but  also  because  from  this  detailed  record  it 
produces  reports  or  statements  of  business  conditions  and  operations. 
These  reports  are  made  out  as  often  and  as  elaborately  as  the  proprietor 
or  manager  desires  them.  They  can  be  analyzed  and  compared  with  state- 
ments of  previous  periods.  Losses  and  gains  can  be  determined  quickly 
and  accurately.  Moreover,  the  future  policies  of  a  business  can  thus  be 
intelligently  controlled  and  directed.  Inefficient  methods  and  unnecessary 
expenses  can  be  eliminated,  costs  reduced,  and  profits  increased  when  these 
reports  of  the  accountant  are  properly  set  up  and  analyzed. 

If  the  accountant  is  to  submit  reports  like  these  in  an  intelligent  man- 
ner, he  must  first  of  all  become  thoroly  familiar  with  accounting  practice. 
What  is  more,  he  must  acquire  a  general  understanding  of  business  prob- 
lems, which  he  attempts  to  solve  for  the  business  man. 

One  of  the  many  important  problems  that  confront  every  business, 
whether  large  or  small,  is  the  difficulty  of  knowing  its  exact  financial  con- 
dition. Managers  and  proprietors  are  usually  so  actively  engaged  with  the 
direction  and  operations  of  the  business  that  they  often  haven't  the  time, 
and  many  haven't  the  ability,  to  determine  with  any  degree  of  accuracy 
just  what  the  financial  condition  of  their  business  is. 

Here  is  where  the  accountant  gives  valuable  service.  From  the  records 
he  sets  up  what  is  called  a  balance  sheet — a  summary  statement  in  which 
he  lists  on  the  left  side  everything  the  business  owns,  and  on  the  right 
side  everything  the  business  owes  to  outsiders.  The  difference  between 
the  two  sides,  or  the  amount  which  must  be  added  to  the  right  side  to 
make  the  two  sides  balance,  represents  the  NET  WORTH  of  the  business. 
If  the  business  owes  more  than  it  owns,  then  the  balancing  figure  is  called 
"deficit." 

THE  BALANCE  SHEET  IN  ACTUAL  BUSINESS 

To  illustrate  the  form,  the  underlying  principle  and  the  important  uses 
of  the  balance  sheet,  we  shall  introduce  you  into  the  actual  operations  of 
a  trading  concern.  The  business  that  we  have  selected  is  the  Johnson  Mer- 
cantile Company,  of  which  Mr.  Johnson  is  the  sole  proprietor. 

How  Mr.  Johnson  Started  His  Business.  He  started  a  retail  dry  goods 
store  in  May,  1917,  with  $30,000.00.  He  bought  a  building  and  lot  in  a 
desirable  location  for  $20,500.00.  The  lot  was  valued  at  $5,500.00  and  the 
building  at  $15,000.00.  The  building  was  too  large  for  the  immediate  use 
of  the  business,  so  Mr.  Johnson  rented  space  on  the  second  floor,  thus 
realizing  extra  income  on  his  investment.  In  buying  this  property  he  paid 
$12,500.00  cash  and  gave  a  mortgage  for  the  balance,  $8,000.00.  This 
mortgage  was  payable  in  five  years.  He  could  have  paid  for  the  property 
in  cash,  but  in  this  way  he  would  have  reduced  his  working  capital  too 
much. 

He  bought  show  cases,  shelving,  cabinets,  office  furniture,  and  other 
necessary  equipment  amounting  to  $4,500.75  and  paid  cash  for  them.  He 
also  found  that  he  needed  a  delivery  truck  and  purchased  one  for  $2,100.00, 
paying  $500,00  down  and  giving  a  note  for  the  balance. 

Assignment  1,  Page  2 


Most  of  his  merchandise  was  bought  on  60  and  90  days'  time.  He  sold 
to  customers  both  on  account  and  for  cash.  He  found  that  it  was  occa- 
sionally desirable  to  require  notes  from  a  few  customers  who  wished  an 
extension  of  time.  On  December  31,  1921,  he  had  $2,500.00  worth  of  such 
notes  on  hand. 

Johnson's  Business  Policy.  His  accounts  with  customers  on  December 
31,  1921,  totaled  $13,404,35,  which  indicates  that  he  did  a  considerable 
amount  of  his  business  on  a  credit  basis.  His  accounts  with  creditors 
amounted  to  $12,472.90. 

Mr.  Johnson  gave  fair  consideration  to  his  customers  in  case  goods 
were  defective.  If  they  returned  the  goods,  he  usually  gave  them  credit 
and  adjusted  his  books  to  show  the  sales  returns.  During  the  four  years 
he  had  built  up  a  prosperous  business.  In  1921,  according  to  his  last 
statement,  he  made  a  net  profit  of  $5,100.00,  which  was  17  per  cent  on  his 
original  investment  and  over  7  per  cent  on  sales.  His  total  sales  for  1921 
amounted  to  $70,141.22.  In  all  his  merchandising  Mr.  Johnson  preferred 
to  handle  the  better  grades  of  stock.  He  dropped  wholesalers  who  fur- 
nished the  poorer  grades  and  took  on  others  who  could  supply  him  with 
dependable  goods,  because  he  felt  that  satisfied  customers  were  one  of  the 
best  advertisements. 

He  also  watched  operating  expenses  closely.  His  business  required  one 
accountant  and  two  clerks.  Mr.  Johnson  did  the  buying  and  financing. 
Whenever  it  was  necessary  to  secure  loans  from  the  bank,  he  always  pre- 
sented the  request  himself,  with  all  the  necessary  papers  and  statements. 

The  Underlying  Principle  of  the  Balance  Sheet.  In  order  to  understand 
better  the  balance  sheet  of  the  Johnson  Mercantile  Company  in  the  form 
in  which  an  accountant  would  draw  it  up,  it  will  be  well  first  to  get  at  the 
underlying  principle  behind  the  balance  sheet  by  considering  a  few  simple 
forms  which  require  no  accounting  knowledge  to  comprehend. 

From  the  description  we  have  already  given  of  this  business,  Figure  1 
needs  little,  if  any  explanation.  It  merely  lists  on  one  side  of  the  sheet 
all  the  property  the  company  owns  and  on  the  other  all  the  debts  of  the 
company. 

The  total  on  the  left  side  is  larger  than  the  total  debts.  The  amount 
of  difference  between  the  values  owned,  $64,330.83,  and  the  total  debts, 
$23,472.90,  is  what  Johnson  could  really  claim  for  himself.  The  net  worth 
is  $40,857.93,  which  is  the  amount  necessary  to  make  the  two  sides  bal- 
ance.   This  represents  Johnson's  equity  in  the  business. 

EXPLANATION  OF  "ASSETS" 

All  the  values  that  the  Johnson  .Mercantile  Company  had  a  title  to  and 
controlled  are  termed  assets.  This  is  true  in  the  case  of  any  business. 
Let  us  explain  further : 

Cash.  On  December  31,  1921,  the  company  had  cash  amounting  to 
$5,450.10.  This  amount  included  not  only  the  actual  cash  in  the  office  and 
the  money  on  deposit  in  the  bank,  but  also  all  checks  in  the  cashier's 
drawer.  Cash  is  an  asset,  therefore,  because  the  business  possesses  it 
and  controls  it. 

Assignment  1,  Page  3 


Accounts  Receivable.  Under  this  item  are  included  all  amounts  due 
the  business  from  customers  who  bought  goods  on  account.  The  total 
outstanding  here  was  $13,404.35.  Statistics  indicate  that  about  80  per 
cent  of  all  business  to-day  is  transacted  on  a  credit  basis.  Merchandise  is 
sold  to  customers  on  good  faith,  and  these  accounts  receivable  are  values 
owned  by  the  business,  because  they  represent  a  claim  of  the  business 
against  outsiders. 


Balance  Sheet,    Johnson  Mercantile  Company,  Dec.   31,   1921. 


Everything  the  Company  Owns 
and  Controls 

Cash $  5,450. 

Due  from  Customers  .   .  13,404. 

Notes  Receivable   .   .  2,500. 

Merchandise  on  Shelf   ,  15,875. 

Furniture  and  Fixtures  4,500. 

Delivery  Equipment  .   .  2,100. 

Building   .....  15,000. 

Land 5.500. 


$64,350. 


Everything  the  Company  Owes 


Purchased  on  Account 
Notes  Held  by  Outsiders 

against  the  Business 
Mortgage  on  Property  . 
Total  Debts   .... 
Balance: 

Net  Worth  .... 


512,472.90 

3,000.00 

8.000.00 

$23,472.90 

40,857.93 

$64.330.8"5 


The  Balance  Sheet  in  Popular  Terms 
Figure  1.  Here  you  have  a  very  simple  balance  sheet.  You  will  see  at  a  glance  that 
everything  the  business  owns  is  listed  on  the  left  side  of  the  balance  sheet  and  every- 
thing the  business  owes  is  listed  on  the  right  side.  It  is  reproduced  here,  not  because 
practicing  accountants  set  up  a  balance  sheet  in  this  form,  but  merely  to  indicate  the 
fundamental  principle  underlying  the  balance  sheet. 

Notes  Receivable.  This  item,  which  amounts  to  $2,500.00,  means  that 
the  business  had  received  notes  from  customers  to  this  amount.  The 
company  holds  these  notes  as  claims  against  the  customers. 


Balance  Sheet,  Johnson  Mercantile  Company,  Dec.  31,  1921, 


Assets 

Cash 

Accounts  Receivable  • 
Notes  Receivable 
Merchandise  Inventory 
Furniture  and  Fixtures 
Delivery  Equipment 

Building  

Land 


$  5.450.10 
13,404.35 

2,500.00 
15»875.63 

4,500.75 

2,100.00 
15,000.00 

5.500.00 


$64,550.85 


Liabilities  and  Capital 


Accounts  Payable. $12,472. 90 
Notes  Payable   .   3,000.00 
Mortgage  Payable.  8.000.00 
Total  Liabilities   .   .   . 
Johnson's  Net  KTorth 

Jan.  1,  1921.  .§35,757.93 

Profit   for   1921     5.100.00 

Net   Worth        .... 


$23,472.90 


40.857.93 

$64.530.85 


The  Balance  Sheet  in  Accounting  Terms 
Figure  2.    There  is  no  difference  between  the  statement  shown  here  and  the  one  shown 
in  Figure  1  except  that  here  accounting  terms  are  used,  while  in  Figure  1  the  various 
items  are  expressed  in  the  simplest  terms  of  ordinary  business.     Familiarize  yourself 
thoroly  with  the  accounting  terms  used,  because  they  will  be  referred  to  frequently. 

Merchandise.    This  includes  all  the  stock  on  hand  belonging  to  the  com- 
pany, even  tho  a  part  of  it  may  not  yet  be  paid  for. 


Assignment  1,  Page  4 


Furniture  and  Fixtures.  This  item  is  self-explanatory  of  course  and 
includes  all  the  furniture  and  fixtures,  valued  at  $4,500.75,  in  the  posses- 
sion of  the  company.  The  delivery  equipment  consists  of  one  delivery 
truck  with  a  cost  value  of  $2,100.00,  which  is  also  an  asset. 

Building  and  Land.  The  building,  worth  $15,000.00,  and  land,  worth 
$5,500,00,  are  assets,  because  the  company  holds  legal  title  to  them.  It 
can  do  with  this  property  whatever  it  wishes.  It  can  sell  or  rent  it  to  out- 
siders. To  be  sure,  an  $8,000.00  mortgage  was  placed  on  the  property 
when  the  company  bought  it,  but  legal  title  rests  with  the  company.  So 
we  see  that  everything  which  the  business  has  a  legal  claim  to  is  an  asset 
and  is  entered  on  the  left  side  of -the  balance  sheet.  Now  we  come  to  the 
right  side — the  liabilities. 

EXPLANATION  OF  "LIABILITIES" 

Briefly,  whatever  the  company  owes  outsiders  is  a  liability,  as  you  will 
see  from  the  list  below: 

Accounts  Payable.  The  company  has  purchased,  and  on  December  31, 
still  owes  for  merchandise  to  the  amount  of  $12,472.90.  The  concerns 
which  sold  this  merchandise  expect  to  be  paid  for  it  in  accordance  with 
the  terms  of  purchase.     Therefore  this  is  a  liability. 

Notes  Payable.  It  has  also  borrowed  money  from  the  bank  or  given 
notes  to  trade  creditors  for  a  total  of  $3,000.00.  The  bank  and  creditors 
hold  these  notes  against  the  company,  and  therefore  the  company  is  liable. 

Mortgage  Payable.  An  indebtedness  of  $8,000.00  in  the  form  of  a  mort- 
gage was  assumed  when  the  company  began  business,  and  so  $8,000.00 
represents  a  claim  upon  the  business. 

EXPLANATION  OF  NET  WORTH  OR  PROPRIETORSHIP 

Net  Worth  consists  of  two  elements — net  worth  at  the  beginning  of 
1921  plus  the  profit  for  the  year.  The  net  worth  amount  for  January  1, 
1921,  was  taken  from  the  balance  sheet  of  December  31,  1920. 

Johnson's  Net  Worth,  Jan.  1,  1921 _ $35,757.93 

Profit  for  1921 _ _ -     5,100.00 

Present  Net  Worth _.„ _ „ $40,857.93 

Mr.  Johnson  had  a  net  claim  on  the  business  amounting  to  $40,857.93. 
This  is  arrived  at  in  another  way  by  using  the  following: 

Total  Assets _ _ $64,330.83 

Total  Liabilities _...._ „ _ 23,472.90 

Present  Net  Worth  or  Proprietorship $40,857.93 

If  it  had  been  found  desirable  or  necessary  for  the  company  to  quit 
business  on  December  31,  1921,  there  would  have  been  more  than  enough 
assets  on  hand  to  satisfy  the  liabilities,  provided,  of  course,  that  they  could 
be  converted  into  cash  without  a  loss. 

Figure  3  shows  the  balance  sheet  as  the  accountant  actually  set  it  up. 
It  conveys  more  information  than  the  simple  balance  sheet  shown  in  Fig- 
ures 1  and  2,  because  both  assets  and  liabilities  are  divided  into  two  groups, 
current  and  fixed. 

Assignment  1,  Page  5 


Balance  Sheet,  Johnson  Mercantile  Company,  Dec.  31,  1021,. 


Currant  Assets 

Cash 

Accounts  Kecelvable 
Notes  Receivable 
Merchandise  Inventory  . 
Total  Current  Assets 

Fixed  Assets 

Furniture  and  Fixtures 
Delivery  Equipment  . 

Buildings  

Land 

Total  Fixed  Assets  . 


$  5,450.10 

13,404.35 

2,500.00 

15.875.63 


$37,230.08 


»  4,500.75 

2,100.00 

15,000.00 

5.500.00 


127.100. 75 


S64.330.85 


Liabilities  and  Capital 

Current  Liabilities 

Accounts  Payable  $12,472.90 
Notes  Payable  .  3.000.00 
Total  Current  Liabilities   $15,472.90 

Fixed  Liabilities 

Mortgage  Payable  .   .   .    8.000.00 

Total  Liabilities $23,472.90 

Capital 


Johnson's  Net  Worth 
Jan,    1,    1921     .      • 
Profit   for  1921  .      . 


$35,757.93 
5^100.00 


40.857.93 
864.330.83 


Account  Form  of  Balance  Sheet 

Figure  3.  By  adding  a  few  more  accounting  terms  to  those  included  in  Figure  2  and 
then  rearranging  the  accounts,  we  arrive  at  the  above  form  which  in  practice  is  known 
as  the  account  form  of  balance  sheet.  It  differs  from  those  shown  in  Figures  1  and  2 
in  that  it  goes  a  step  further  and  classifies  the  assets  and  liabilities  into  two  groups- 
current  and  fixed.  This  is  a  very  important  classification,  the  necessity  for  which  will 
become  readily  apparent  as  you  study  the  explanation  given  in  the  text. 

Current  Assets.  Certain  assets  are  readily  convertible  into  cash.  They 
will  be  converted  into  cash  by  their  very  nature.  Examples,  aside  from 
cash  itself,  are  accounts  receivable,  notes  receivable,  and  merchandise. 
They  are  continually  being  affected  by  business  transactions,  and  there- 
fore vary  from  time  to  time  in  amount  more  than  do  those  classified  in 
the  fixed  group.  The  amounts  change  from  day  to  day.  Such  assets  are 
known  as  current  assets. 

For  example,  cash  may  be  a  large  amount  to-day  and  a  very  small 
amount  to-morrow.  Cash  flows  into  the  business  and  out  again.  Accounts 
receivable  grow  and  diminish.  The  amount  of  notes  receivable  becomes 
larger  as  new  loans  are  granted  and  smaller  as  they  mature.  Merchandise 
is  sold  every  day  and  the  stock  is  replenished  frequently. 

Current  Assets  are  also  called  liquid,  floating,  or  quick  assets. 

Fixed  Assets.  The  items  under  Fixed  Assets  represent  more  perma- 
nent values,  those  that  ordinarily  do  not  change  so  greatly  nor  so  quickly. 
They  are  essential  to  the  continuation  of  the  business,  and  are  not  so 
easily  convertible  into  cash. 

Furniture  and  fixtures  are  purchased  for  continued  use,  and  are  not 
disposed  of  until  they  are  worn  out  or  are  no  longer  needed.  Delivery 
equipment  is  bought  for  permanent  use.  It  remains  in  the  business  longer 
than  the  current  assets.  Buildings  and  land  remain  in  the  business  as  long 
as  the  company  needs  them.  You  can  easily  see  that  they  are  more  perma- 
nent than  the  current  assets. 


Assignment  1,  Page  6 


Most  of  these  fixed  assets,  of  course,  depreciate  in  value.  The  decrease 
in  their  value,  commonly  called  depreciation,  is  one  of  the  operating  ex- 
penses. The  assets  themselves,  however,  are  considered  permanent,  so  long 
as  the  business  operates  and  needs  them.  For  the  sake  of  simplicity,  we 
have  ignored  depreciation  in  setting  up  the  balance  sheets  in  this  Assign- 
ment. 

Current  Liabilities.  The  current  liabilities,  likewise,  such  as  accounts 
payable  and  notes  payable,  grow  and  diminish  according  to  the  volume  of 
the  business. 

Fixed  Liabilities.  On  the  other  hand,  a  mortgage  payable  is  a  fixed 
liability.  It  usually  runs  for  a  longer  period  of  time,  until  it  matures,  when 
it  is  either  paid  off  or  renewed. 


Balance  Sheet, 
Current  Assets 


Johnson  Mercantile  Company,   Dec. 
Assets 


51,  1921. 


Accounts  Receivable 
Notes  Receivable 
Merchandise  Inventory 
Total  Current  Assets  . 

Fixed  Assets 

Furniture  and  Fixtures 
Delivery  Equipment 
Buildings    ... 

Land 

Total  Fixed  Assets 


Total  Assets 


$  5,450.10 

13,404.35 

2,500.00 

15,875.65 


$37,230.08 


$  4,500.75 

2,100.00 

15,000.00 

5,500.00 


27,100.75 


$64,330.83 


Liabilities 


$15,472.90 


Current  Liabilities 

Accounts  Payable   $12,472.90 

Notes  Payable   ......    5.000.00 

Total  Current  Liabilities   

Fixed  Liabilities 

Mortgage  Payable   8.000.00 

Total  Liabilities  .   

Net  Worth,  or  Proprietorship  • 


25.472.90 
$40,857.95 


The  Report  Form  of  Balance  Sheet 

Figure  4.  Here  is  still  another  form  of  balance  sheet,  which  has  a  definite  purpose  in 
accounting  practice.  Among  accountants  it  is  known  as  the  report  form.  It  was 
devised  primarily  so  that  it  could  be  more  easily  interpreted  by  those  unfamiliar  with 
accounting  practice.  It  is  popular  also  because  it  can  be  prepared  on  a  standard  car- 
riage typewriter.  The  main  purpose  of  any  balance  sheet  is  to  arrive  at  the  net  worth. 
Compare  the  procedure  in  this  report  form  with  that  of  the  account  form,  and  you  will 
find  that  here  the  net  worth  is  arrived  at  by  ordinary  arithmetic  (total  assets — total 
liabalities=net  worth),  while  in  the  account  form  it  is  necessary  to  use  a  knowledge 
of  accounting  practice  in  order  to  balance  both  sides  of  the  balance  sheet. 


Assignment  1,  Pa4;6  7 


The  balance  sheet  in  Figure  3  shows  a  form  recognized  and  approved 
by  accountants  and  business  men.  It  is  called  the  "account  form."  You 
can  always  refer  to  it  as  a  model  in  setting  up  the  balance  sheets  in  your 
problems.  Note  especially  the  heading — name  of  business,  "balance  sheet," 
and  date.  Without  the  proper  heading,  a  balance  sheet  has  neither  mean- 
ing nor  value. 

The  Report  Form  of  the  Balance  Sheet.    The  report  form  of  the  balance 

sheet  which  is  shown  in  Figure  4  is  another  recognized  form  of  the  balance 
sheet.  It  is  popular  because  it  is  more  readily  understood  than  the  account 
form  by  persons  not  familiar  with  accounting.  The  net  worth  amount 
appearing  at  the  bottom  of  the  statement  is  easily  determined.  Total  lia- 
bilities are  subtracted  from  total  assets  in  the  ordinary  arithmetical 
method  to  determine  net  worth,  instead  of  balancing  the  two  sides  as  in 
the  account  form. 

SIMPLICITY  OF  THE  BALANCE  SHEET 

The  principle  of  Johnson's  balance  sheet  is  just  as  simple  and  easy  to 
understand  as  the  equation  which  you  learned  in  the  grades : 

$100-$25=$75 

Assets— Liabilities=Net  Worth 

Take  another  simple  illustration:  When  you  are  ready  to  build  your 
own  home,  you  may  need  to  borrow  some  money.  You  find  that  your  house 
will  cost  $10,000.00,  and  you  have  only  $5,500.00  cash.  If  you  proceed  in 
the  same  way  as  most  people  do,  you  will  arrange  for  a  loan  for  the  bal- 
ance, $4,500.00,  and  the  man  who  grants  you  the  loan  takes  a  mortgage  or 
claim  on  your  house.  You  are  indebted  to  him  for  this  amount,  even  tho 
you  hold  legal  title  to  the  property.  Your  net  claim  in  the  house  will  be 
determined  thus: 

$10,000.00-$4,500.00=$5,500.00 

The  $5,500.00  represents  your  proprietorship,  or  net  worth.  It  is  the 
difference  between  the  total  cost  of  the  house  and  your  liability,  $4,500.00. 
Apply  this  same  principle  to  the  balance  sheet  of  the  Johnson  Mercantile 
Company  and  you  will  have  the  equation  which  is  graphically  presented 
in  Figure  5. 


TOTAL  ASSETS 


^6^.250.S3 


I       TOTAt 
LtABiLITIES 

$23^72.90 


PROPRIETOR 

5HH>   OR 

NtT  WORTH 


The  Proprietorship  Equation 

Figure  5.  The  making  up  of  a  balance  sheet  for  the  purpose  of  arriving  at  the  net 
worth  is  merely  a  matter  of  arithmetic,  as  is  indicated  above.  What  complicates  the 
procedure  for  some  is  the  accounting  principles  and  practice  which  must  be  brought 
into  play  before  the  figures  can  be  subjected  to  this  simple  equation.  The  explanation 
of  these  principles  and  practices  is  reserved  for  future  assignments.  The  main  point 
to  consider  here  is  that  the  purpose  of  all  accounting  is  to  simplify  business  records 
and  reduce  them  to  simple  equations  such  as  the  above. 


Assignment  1,  Page  8 


It  is  evident  that  the  proprietor  can  claim  what  is  left  after  all  debts 
to  outsiders  are  paid. 


ASSETs/*2.000 
fCASH), 


i2££c\woRTH 


PRACTICAL  PROBLEMS   ILLUSTRATING  PROPRIETORSHIP 

EQUATION 

Every  transaction  that  affects  the  business,  ultimately  affects  the  bal- 
ance sheet  also.  You  could  make  a  balance  sheet  after  each  transaction 
if  you  wished.  This  would  involve  a  great  amount  of  work,  however,  and 
is  not  desirable.  In  order  to  bring  out  the  exact  procedure  involved,  we 
shall  present  a  series  of  simple  transactions  to  illustrate  what  we  mean. 
An  exact  balance  is  maintained  between  the  two  sides  of  the  equation  at 
every  step. 

Transaction  1.  On  February  2, 
1921,  Mr.  A.  B.  White  has 
$2,000.00  in  the  bank,  with 
which  he  decides  to  go  into 
business. 

Equation  1. 

Assets       Net  Worth 
$2,000.00  =  $2,000.00 

His  Net  Worth  equals  his  total 
assets,  $2,000.00. 

Transaction  2.  February  2,  he 
pays  $50.00  rent  for  his 
store.  This  is  an  operating 
expense,  not  an  investment. 

Equation  2. 

Cash  Net  Worth 

$1,950.00  =  $1,950.00 

Assets  are  decreased  $50.00. 
Net  Worth  is  decreased  $50.00. 

Transaction  3.  February  3,  he 
buys  show  cases  for  $150.00. 
(This  purchase  is  a  capital 
investment,  not  an  operat- 
ing expense,  which  will  also 
be  explained  in  Lesson  2.) 

Equation  3. 

Show  Cases  $150,001         Net 

4-     \=   Worth 
Cash  l,800.00j     $1,950.00 

One  asset  is  increased  $150.00. 

Another  is  decreased  $150.00. 

Net  Worth  remains  the  same. 


iii£»o\wolTH 


Assignment  1,  Page  9 


Showcases  $150.00" 

+ 
Stock  700.00 

Cash  1,300.00 


Transaction  4.  February  4,  he 
buys  stock  worth  $500.00 
for  cash. 

Equation  4. 

Show  Cases  $150.00" 

4-  Net 

Stock  500.00^=    Worth 

4-  $1,950.00 

Cash  l,300.00j 

One  asset  is  increased  $500.00. 

Another  is  decreased  $500.00. 

Net  Worth  remains  the  same. 

Transaction  5.  February  5,  he 
buys  $200.00  worth  of  stock 
on  account. 

Equation  5. 

fAccounts 
Payable 
$200.00 

+ 
Net 
Worth 
[$1,950.00 

Assets  are  increased  $200.00. 

Liabilities  are  increased 

$200.00. 

Net  Worth  remains  the  same. 

Transaction  6.  February  7,  he 
buys  $300.00  worth  of  stock 
and  gives  a  note. 

Equation  6. 

Notes 
Payable 
$300.00 

+ 
Accounts 
Payable 
$200.00 

+ 

Net 

Worth 

[$1,950.00 

Assets  are  increased  $300.00. 
Liabilities    are   increased 
$300.00. 

Net  Worth  remains  the  same. 


Showcases  $150.00" 

+ 
Stock  1,000.00 

+ 
Cash  1,300.00 


Assignment  1,  Page  10 


Transaction  7.  February  7,  he 
sells  for  cash,  stock  for 
$30.00  that  cost  $20.00.  On 
this  transaction  he  makes  a 
gross  profit  of  $10.00.  (This 
will  also  be  fully  explained 
in  Lesson  2.) 

Equation  7. 

Notes 
Payable 
$300.00 

+ 
Accounts 
Payable 
$200.00 

+ 

Net 

Worth 

i$l,960.00 

One  asset,  stock,  is  decreased 
$20.00. 

Another    asset,    cash,    is    in- 
creased $30.00. 

Net  Worth  is  increased  $10.00. 


Showcases  $150.00" 

+ 
Stock  980.00 

Cash  1,330.00 


We  have  given  you  transactions  of  the  simplest  kind.  As  you  proceed 
in  the  course  you  will  have  others,  but  these  few  show  clearly  that  the 
proprietorship  equation  is  affected  each  time  that  Mr.  White  transacts 
business. 

Whenever  he  buys  and  sells,  his  assets,  liabilities  and  net  worth  are 
changed  to  a  greater  or  lesser  degree.  This  could  be  illustrated  still  fur- 
ther by  transactions  that  involve  sales  discount,  purchase  discount,  inter- 
est paid,  interest  earned,  payment  of  taxes,  insurance,  etc.  Every  trans- 
action, no  matter  how  small,  that  affects  the  business,  will  also  affect  cer- 
tain elements  in  the  proprietorship  equation  at  that  particular  moment, 
and  these  changes  will  ultimately  appear  in  the  balance  sheet. 

The  balance  sheet  is  a  summary  of  the  numerous  transactions  of  a 
period.  It  simply  shows  the  condition  of  a  business  at  a  certain  time  with- 
out indicating  how  that  condition  came  about.  It  may  show  an  increase 
or  decrease  in  net  worth,  but  does  not  indicate  in  any  way  what  caused 
this  change.  The  accountant  prepares  other  statements  in  which  he  dis- 
closes the  causes  of  profits  and  losses.  The  balance  sheet  shows  the  condi- 
tion not  the  progress  of  a  business. 

So  important  is  the  balance  sheet  that  business  could  scarcely  be 
conducted  without  it.  The  following  five  uses  to  which  it  is  constantly 
being  put  will  explain  its  important  relation  to  business. 


Assigiunent  1,  Page  11 


1.  RELATION  OF  THE  BALANCE  SHEET  TO  BUSINESS  CONTROL 

What  persons  are  most  interested  in  the  balance  sheet  of  the  Johnson 
Mercantile  Company? 

The  proprietor,  first  of  all.    He  uses  it  in  three  ways: 

First:  He  can  see  at  a  glance  whether  his  net  worth  has  increased  or  decreased,  by 
comparing  the  net  worth  of  December  31,  1921,  with  his  net  worth  January  1, 
1921.  That  is  what  he  wishes  to  know.  If  his  net  worth  is  less  at  the  end  than 
it  was  at  the  beginning  of  the  year,  he  is  certain  that  his  business  has  not  been 
progrressing  as  it  should.    If  it  is  more,  then  he  knows  that  his  business  is  growing. 

Second:  He  can  better  control  his  business  in  the  future.  He  can  compare  the  total 
current  assets  with  the  total  fixed  assets  to  determine  whether  or  not  too  much 
capital  is  tied  up  in  the  permanent  investment.  He  will  also  consider  the  amount 
of  merchandise  on  hand.  This  may  be  too  large  or  too  small.  If  his  sales  have 
been  slow,  he  will  decide  to  reduce  prices,  to  advertise  more  widely,  and  to  reduce 
his  stock. 

Third:  He  can  determine  how  best  to  meet  his  liabilities.  Liabilities  may  be  due  in 
a  very  short  time,  and  he  will  need  cash  with  which  to  pay  them.  He  may  find 
that  it  is  necessary  to  take  some  of  his  notes  receivable  to  the  bank  and  have  them 
discounted,  so  as  to  get  the  necessary  cash. 

He  may,  however,  determine  that  he  can  borrow  money  from  the  bank 
to  meet  the  immediate  obligation  and  tide  him  over  until  increased  trading 
will  bring  in  more  cash,  with  which  he  can  pay  his  new  liability.  He  prob- 
ably discovers  that  the  Accounts  Receivable  amount  is  too  large,  and  there- 
fore he  will  press  collections  from  customers,  or  demand  notes  to  cover 
their  accounts,  so  that  he  can  discount  the  notes  at  the  bank.  He  may 
even  decide  to  sell  part  of  his  accounts  receivable  at  a  discount  to  some 
broker  and  obtain  enough  cash  in  this  way. 

Thus  you  will  see  that  the  proprietor  will  be  able  to  proceed  more 
intelligently  when  he  has  the  information  a  balance  sheet  furnishes. 

2.    BALANCE  SHEETS  NECESSARY  IN  MAKING  LOANS 

Here  is  what  actually  happened  in  the  Johnson  Mercantile  Company. 
On  January  21,  1922,  the  company  owed  the  Southern  Woolen  Mills 
$4,500.00,  which  it  must  pay  within  ten  days  in  order  to  take  advantage  of 
a  2  per  cent  discount.  The  company  did  not  have  this  amount  of  cash  avail- 
able, so  Mr.  Johnson  looked  over  the  balance  sheet  of  December  31, 1921,  set 
up  in  such  a  form  that  he  could  determine  whether  or  not  the  Johnson  Mer- 
cantile Company  was  in  a  position  to  borrow  money  from  the  National 
Exchange  Bank,  if  it  were  necessary.  The  balance  sheet  showed  cash  on 
hand,  $5,450.10.  But  the  amount  of  cash  on  hand  January  21  was  even 
less,  because  of  recent  disbursements.  He  found  that  it  would  be  necessary 
to  borrow  from  the  bank.  What  did  he  do?  He  proceeded  to  do  exactly 
what  he  knew  the  credit  officer  of  the  bank  would  do.  He  compared  the 
total  current  assets  with  the  total  current  liabilities.  He  found  that  the 
current  assets  amounted  to  $37,230.08  and  the  current  liabilities  amounted 
to  $15,472.90.  The  proportion  was  better  than  2  to  1.  In  other  words, 
those  assets  that  could  be  realized  on  easily,  outbalanced  those  liabilities 
that  would  demand  payment  in  a  short  time. 

With  this  information  Mr.  Johnson  went  to  the  bank,  feeling  reason- 
ably sure  that  he  would  be  able  to  secure  a  loan.    He  presented  his  request 

Assignment  1,  Page  12 


for  a  loan  of  $2,000.00,  since  he  thought  this  would  be  sufficient,  and  gave 
the  bank  the  balance  sheet.  He  also  gave  the  bank  a  list  of  his  customers' 
balances,  with  due  dates  in  each  case.  Within  a  short  time  he  was  noti- 
fied by  the  credit  officer  that  he  could  have  the  money.  The  bank  was 
assured  from  the  balance  sheet  that  the  company  was  operated  intelli- 
gently and  in  accordance  with  correct  business  methods.  The  banker  is 
always  interested  in  knowing  whether  his  paper  can  be  liquidated  out  of 
the  current  assets,  and  in  this  particular  case  he  knew  that  this  was  pos- 
sible. 

If  the  bank  had  found  that  the  current  assets  were  just  about  equal 
to,  or  less  than,  the  current  liabilities,  it  would  probably  have  refused  the 
loan,  even  though  the  fixed  assets  were  of  large  amount. 

3.  TRADE  CREDITORS  ALSO  DEMAND  BALANCE  SHEETS 

Let  us  go  a  little  further  into  the  actual  operations  of  the  Johnson 
Mercantile  Company,  to  see  how  creditors  use  the  balance  sheets  of  their 
customers. 

In  the  early  part  of  February,  1922,  a  salesman  visited  the  company. 
He  represented  the  New  York  Merchandising  Company  and  was  selling 
an  attractive  line  of  merchandise.  The  Johnson  Company  had  thus  far 
been  buying  most  of  their  stock  from  a  St.  Louis  house,  but  the  salesman 
finally  persuaded  Mr.  Johnson  to  give  him  an  order  for  $6,500.00  worth 
of  goods,  on  sixty  days'  time.  On  February  11,  a  letter  came  from  the 
New  York  house,  thanking  the  Johnson  people  for  their  order  and  promis- 
ing prompt  delivery. 

Why  was  the  New  York  company  so  willing  to  grant  credit  to  its  new 
customer?  Simply  because  it  knew  that  the  current  assets  would  cover 
this  risk. 

As  soon  as  the  salesman  had  secured  the  order,  he  filled  out  a  report, 
in  which  he  indicated  the  general  financial  condition  of  the  Johnson  Com- 
pany. The  New  York  company  immediately  turned  over  the  order  and 
the  report  to  its  credit  department,  which  at  once  set  to  work  to  determine 
whether  the  credit  should  be  given.  This  department  analyzed  the  report ; 
but  since  it  showed  only  the  present  condition  of  the  Johnson  Conipany, 
they  referred  to  mercantile  agency  reports  to  get  the  financial  rating  of 
the  Johnson  Company.  The  rating  given  there  had  been  determined  by 
an  analysis  of  the  balance  sheets  of  previous  years,  or  from  other  infor- 
mation furnished  by  the  Johnson  Company. 

The  result  of  the  investigation  was  favorable.  Credit  was  allowed 
because  the  rating  of  the  Johnson  Company  was  good. 

4.     BALANCE  SHEET  NECESSARY  WHEN  BUSINESSES 

ARE  MERGED 

Here  is  a  practical  case  that  illustrates  another  important  use  of  the 
balance  sheet.  On  March  6,  1922,  the  Smith  Enterprise  Company,  the 
strongest  rival  in  the  same  city  with  the  Johnson  Merchantile  Company, 
proposed  that  the  two  concerns  merge  into  one.  The  Smith  people  argued 
that  expenses  could  be  reduced,  the  total  investment  would  be  consider- 
ably increased,  and  the  business  administration  of  both  concerns,  when 

Assignment  1,  Page  13 


combined,  would  create  a  strong  business  organization.    Moreover,  exist- 
ing competition  could  be  eliminated. 

The  first  and  the  most  important  step  in  the  undertaking  was  an 
exchange  of  balance  sheets  between  the  two  companies.  New  balance 
sheets  were  set  up  on  March  6,  1922,  because  those  of  December  31,  1921, 
did  not  show  the  facts  as  they  existed  three  months  later.  Of  course 
other  documents  and  reports  were  exchanged,  but  probably  none  proved 
so  important  and  none  were  so  thoroly  analyzed  as  the  balance  sheets. 

The  Johnson  Mercantile  Company  found  that  the  current  liabilities 
of  the  Smith  Enterprise  company  were  too  large  and  the  current  assets 
too  small  to  justify  a  merger.  The  result  was  that  the  Johnson  Mer- 
cantile Company  declined  the  offer,  basing  its  decision  on  the  balance 
sheet  analysis. 

5.     BALANCE  SHEETS  NECESSARY  FOR  AUDITORS  AND 
GOVERNMENT  OFFICIALS 

The  records  of  any  business  cannot  be  relied  upon  as  being  absolutely 
correct  unless  they  are  audited  at  regular  intervals.  In  the  Auditing  sec- 
tion of  the  Higher  Accountancy  course,  you  will  learn  how  the  auditor 
checks  up  and  verifies  the  balance  sheet  items.  The  amounts  given  in 
the  balance  sheet  must  agree  with  the  facts  as  they  are  determined  by 
actual  count  and  by  the  audit  of  the  records. 

When  the  Federal  Tax  returns  are  made,  important  information  is 
taken  from  the  balance  sheet,  and  when  the  government  verifies  the  tax 
report,  it  requires  that  the  balance  sheet  be  submitted  along  with  other 
reports. 

THE   IMPORTANT  POINTS   OF  THIS  ASSIGNMENT 

Now  that  you  have  followed  our  discussion  of  the  balance  sheet, 
we  suggest  that  at  this  point  you  recall  and  emphasize  the  big  funda- 
mental ideas  as  they  have  been  explained  and  illustrated  in  Assignment 
1.     The  following  main  points  are  of  prime  importance: 

First.  The  balance  sheet  is  a  barometer  by  which  the  financial  con- 
dition of  a  business  can  be  determined.  It  pictures  the  financial 
condition  of  a  business. 

Second.  It  is  set  up  in  a  standard  form.  Assets  and  liabilities  are 
classified. 

Third.  Every  business  transaction,  no  matter  how  small,  will  affect 
the  balance  sheet. 

Fourth.    The  balance  sheet  is  a  valuable  aid  to  business. 

1.  It  shows  the  proprietor  and  manager  where  the  business  is 
strong  and  where  it  is  weak. 

2.  It  helps  bankers  to  grant  loans  intelligently. 

3.  It  aids  trade  creditors  in  allowing  credit  to  customers. 

4.  It  is  used  by  concerns  contemplating  mergers. 

5.  It  is  made  the  basis  of  investigation  by  auditors  and  govern- 
ment officials. 

Because  the  balance  sheet  is  of  such  great  importance  to  business,  we 
have  begun  the  study  of  accounting  with  the  balance  sheet.  Affairs  in 
business  as  well  as  in  accounting  practice  center  around  it. 

Assignment  1,  Page  14 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  1 

Use  the  ruled  paper  which  the  University  has  furnished  you,  and 
prepare  and  send  in  solutions  for  the  following  practcial  problems. 

Problem  work  of  this  sort  will  be  given  you  at  the  end  of  each  assign- 
ment. These  problems  arise  in  actual  business  and  thru  understanding 
and  mastering  them  you  are  gaining  the  ability  to  successfully  meet  and 
master  similar  situations  that  arise  in  business. 

SPECIFIC  INSTRUCTIONS 

In  analyzing  and  working  out  these  problems,  as  well  as  those  in 
subsequent  assignments,  follow  carefully  the  following  instructions: 

1  Use  extreme  care  at  all  times. 

2  Do  not  attempt  to  solve  the  problems  until  you  know  thoroly 
what  is  in  the  Assignment. 

3  Use  pen  and  ink ;  or  typewriter  if  convenient. 

4  Number  each  page  of  your  work.  It  is  a  wise  precaution  also  to 
put  your  name  and  the  assignment  number  on  each  page  of 
your  work. 

5  Observe  also  very  carefully  the  directions  on  the  slips  marked 
IMPORTANT,  a  number  of  which  are  inclosed  with  your  assign- 
ment material. 

6  Do  not  fail  to  use  one  of  these  slips — filling  in  your  name,  address, 
and  matriculation  number  very  plainly  whenever  you  submit 
work  for  examination. 

7  Read  and  observe  carefully  the  directions  given  on  the  inside 
cover  of  your  binder. 

PROBLEMS 

1.  On  June  30,  1921,  the  records  of  the  C.  0.  Law  Coal  Company 
show  the  following  assets  and  liabilities : 

Coal  on  Hand „ $3,700.00 

Accounts  Payable _ 2,200.00 

Notes  Receivable _ 1,200.00 

Accounts  Receivable 5,100.00 

Mortgage  Payable ...._ 4,000.00 

Cash  on  Hand 4,000.00 

Notes  Payable _ - 1,545.00 

Auto  Truck _._ 3,500.00 

Coal  Yards  and  Sheds _ 8,000.00 

Office  Building _ 2,100.00 

Furniture _ _ 320.00 

List  all  assets  in  one  column  and  all  liabilities  in  another. 

Assignment  1,  Page  15 


2.  Mr.  Law  wishes  to  know  his  net  worth  on  June  30,  1921.  Show 
this  in  a  proprietorship  equation. 

3.  On  July  7,  1921,  Mr.  Law  finds  that  he  must  borrow  $2,000.00 
from  the  bank.  He  asks  you  as  his  accountant  to  prepare  a  statement  of 
the  financial  condition  of  his  business  on  June  80,  1921.  Prepare  the  bal- 
ance sheet  in  the  account  form,  listing  the  items  in  four  separate  groups : 

Current  Assets  Current  Liabilities 

Fixed  Assets  Fixed  Liabilities 

(a)  Send  in  the  balance  sheet. 

(b)  Do  you  believe  the  bank  will  make  him  a  loan?    State  the 
reasons  for  your  answer. 

4,     On  March  31,  1921,  Mr.  L.  M.  Strong  opens  a  furniture  store. 

(a)  He  immediately  deposits  $2,000.00  in  the  bank  as  his  orig- 
inal investment  in  the  business. 

(b)  April  1,  he  pays  $50.00  for  rent. 

(c)  April  2,  he  buys  $1,000.00  worth  of  furniture,  on  account, 
from  the  Chicago  Furniture  Company. 

(d)  April  5,  he  sells  furniture,  for  $75.00  cash,  that  cost  him 
$50.00. 

(e)  April  7,  he  pays  $20.00  for  clerk's  salary. 

(f )  April  8,  he  issues  a  30-day  note  covering  his  account  with 
the  Chicago  Furniture  Company. 

Analyze  each  transaction,  showing  in  each  case  the  amount  of  increase 
or  decrease  for  assets,  liabilities,  and  net  worth. 

For  example,  under  (a)  and  (b)  you  will  state  your  answer  thus : 

(a)  Increase  in  assets,  $2,000.00. 
Increase  in  proprietorship,  $2,000.00. 

(b)  Decrease  in  assets,  $50.00. 
Decrease  in  proprietorship,  $50.00. 

5.  On  December  31,  1921,  the  accountant  for  the  James  Walters 
Hardware  Company  is  asked  to  make  a  balance  sheet  for  the  proprietor. 

He  finds  that  the  company  has  Cash,  $3,994.57;  Merchandise, 
$21,450.80;  Store  Fixtures,  $2,555.00;  Notes  Receivable,  $1,700.00;  Auto 
Trucks,  $2,500.00;  Buildings,  $9,000.00;  Land,  $14,500.00;  Stocks  and 
Bonds  bought  for  investment,  $1,300.00  (considered  as  a  fixed  asset) ;  and 
Accounts  Receivable,  $6,210.35. 

It  owes  to  outsiders:  Accounts  Payable,  $15,461.20;  Notes  Payable, 
$4,700.00;  and  Mortgage  Payable,  $6,000.00. 

Assume  that  you  are  the  accountant.  Make  the  balance  sheet  in  the 
account  form,  classifying  assets  and  liabilities  into  proper  groups. 


Assignment  1,  Page  16 


Higher  Accountancy 

Ul  IP 

PRINCIPLES 
PRACTICE  fiw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  2 

THE  PROFIT  AND  LOSS 
STATEMENT 


1LOOK  UPON  modern  accounting  as  a  system  by 
which  a  business  is  analyzed,  its  different  parts  weighed 
and  measured,  their  relations  one  to  another  ascertained 
with  precision,  so  that  the  centers  of  waste  and  weakness 
are  laid  bare  and  the  way  is  made  plain  for  continuous 
improvement.  Here  is  a  field  for  the  exercise  of  a  high 
grade  of  scientific  insight  and  imagination. 

ELMER  E.  BROWN,  PH.D. 

Former  U.  S.  Commissioner  of  Education 


LaSalle  Extension  University 

Chicago 


NHA.2 

(1-43) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  bj^  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.le  Extension  University 

Printed  in  the  U.  S.  A. 


THE  PROFIT  AND  LOSS  STATEMENT 

A  REPORT  OF  BUSINESS  PROGRESS 

You  have  seen  how  the  balance  sheet  can  be  of  real  value  to  the  man- 
ager of  a  business.  It  is  a  sort  of  barometer  by  which  the  financial  con- 
dition of  a  business  is  determined. 

The  balance  sheet,  however,  can  give  only  part  of  the  information  de- 
sired. Business  men  want  to  know  not  only  how  the  business  stands  finan- 
cially, but  also  whether  it  is  making  a  profit  or  running  at  a  loss. 

When  a  profit  has  been  made,  business  men  want  to  know  what  factors 
produced  it,  so  that  in  the  future  they  can  expand  their  business  along 
those  lines  that  appear  to  be  most  profitable. 

If  a  business  has  operated  at  a  loss,  the  business  man  certainly  should 
have  a  detailed  statement  as  to  the  causes:  such,  for  example,  as  unnec- 
essary expenses,  careless  purchasing,  unscientific  advertising,  etc.  For 
information  like  this,  the  balance  sheet  is,  of  course,  inadequate. 

Altho  the  balance  sheet  gives  the  amount  of  net  profit,  as  shown  in  the 
balance  sheet  of  the  Johnson  Mercantile  Company  in  Assignment  1,  it  does 
not  give  any  information  on  how  this  profit  was  made.  It  is  necessary, 
therefore,  that  the  accountant  prepare  another  report,  showing  what  in- 
come was  received  during  the  period  and  what  expenses  reduced  this  in- 
come to  the  net-profit  figure.  Such  a  report  is  commonly  called  a  "Profit 
and  Loss  Statement." 

There  are  four  things  which  the  accountant  must  consider  in  setting  up 
a  profit  and  loss  statement  in  approved  form.    They  are : 

Income  from  Sales — to  distinguish  between  gross  sales 
and  net  sales. 

Cost  of  Goods  Sold — to  determine  gross  profit  or  loss. 

Operating  Expenses — to  be  deducted  from  gross  profit. 

Miscellaneous  Income  and  Expense — transactions  out- 
side of  the  regular  business  operations. 

Income  from  Sales.  In  any  trading  concern,  the  chief  source  of  in- 
come is  from  sales  of  merchandise.  The  total  sales  for  a  period  are  called 
"Gross  Sales,"  and  differ  from  "Net  Sales"  by  the  amount  of  any  returned 
goods  or  allowances  made  to  customers. 

Cost  of  Goods  Sold.  After  the  net  sales  have  been  determined,  it  is 
necessary  to  consider  what  these  goods  cost  the  proprietor.  This  cost, 
whatever  it  may  be,  is  deducted  from  the  net  sales,  leaving  "gross  profit," 
which  is  the  profit  realized  on  the  sale  of  merchandise  before  any  of  the 
operating  expenses  are  considered. 


Operating  Expenses.  This  term  covers  such  items  as  salaries,  office  ex- 
pense, rent,  taxes,  heat,  light,  insurance,  delivery  expense,  loss  on  bad 
debts,  etc.  The  total  expense  is  deducted  from  the  gross  profit  in  order  to 
determine  "net  operating  profit"  or  loss. 

Miscellaneous  Transactions.  There  are  often  transactions  outside  of 
regular  operations  that  must  be  considered  before  one  can  determine  the 
final  net  profit.  For  example,  it  may  be  necessary  for  the  proprietor  to 
pay  interest.  The  amount  spent  for  interest  should  be  deducted  after  the 
net  operating  profit  is  determined.  There  is  also  a  possibility  of  receiving 
income  from  sources  other  than  sales.  The  proprietor  may  rent  a  part  of 
his  space  or  he  may  receive  interest,  thus  realizing  an  income  which  is 
outside  the  regular  trading  operations.  This  income  must  be  added.  The 
result  is  "net  profit"  or  loss. 

The  Profit  and  Loss  Statement  in  Actual  Business.  The  accountant  for 
the  Johnson  Mercantile  Company  prepared  a  standard  profit  and  loss  state- 
ment in  which  he  listed  income  from  sales,  cost  of  goods  sold,  operating 
expenses,  miscellaneous  transactions,  and  finally  the  net  profit.  This  profit 
and  loss  statement  is  reproduced  in  Figure  1,  and  illustrates  three  impor- 
tant points  with  which  the  accountant  must  be  fully  familiar. 

I.  The  form  of  the  profit  and  loss  statement — its  general 

outline  and  construction. 
II.  The  details  that  make  up  each  section. 
III.  Some  ways  in  which  the  profit  and  loss  statement  may 
be  used  by  business  executives. 

THE  FORM  OF  THE  PROFIT  AND  LOSS  STATEMENT 

The  items  checked  (V)  in  the  profit  and  loss  statement  shown  in  Fig- 
ure 1  are  items  with  which  you  are  already  more  or  less  familiar  from  your 
own  business  experience.    You  will  find  that  they  are  as  follows: 

Gross  Sales  $70,141.22 

Returned  Sales  447.25 

Net  Sales $69,693.97 

Cost  of  Goods  Sold 41,573.64 

Gross  Profit  $28,120.33 

Operating  Expenses  22,077.58 

Net  Operating  Profit $  6,042.75 

Income  from  Transactions  Outside  the  Regular  Oper- 
ations           825.00 

$6,867.75 
Charges  to  Income 1,767.75 

Net  Profit  for  Year $  5,100.00 

You  begin  with  the  selling  price,  subtract  the  cost  of  goods  sold  and 
the  operating  expenses,  and  then  add  other  income  and  subtract  other 
expenses. 

Assignment  2,  Page  2 


Johnson  Mercantile  Company 

PROFIT  AND  LOSS  STATEMENT 

For  year  ended  Dec.  31,  1921 
Sales 

Total  Sales $70,141.22         yf 

Less  Returned  Sales  447.25         V 

Net  Sales   $69,693.97/ 

Cost  of  Goods  Sold 

Inventory.  Jan.  1,  1921 $12,449.27 

Purchases   ,  $46,000.00 

Less  Returned  Purchases   1,000.00 

Net  Purchases  ....   45^000.00 

$57,449.27 

Less  Inventory,  Dec.  31,  1921 15,875.65 

Cost  of  Goods  Sold 41,573.64V 

Gross  Profit •  •: $28,120.33^ 

Operating  Expenses 

Selling  Expenses  ....   $11,515.40 

Administration  Expenses   4,190.15 

General  ...     6.572.03 

Total  Operating  Expenses  •  •   22,077.58V 

Net  Operating  Profit    ..........  $  6,042.75V 

Miscellaneous  Income  and  Expense 
Other  Income 

Interest  Earned $  40.00 

Rent  Received  360.00 

Sales  of  Waste  Paper 50.00 

For  Use  of  Truck  by  Customers   .' 125.00 

Purchase  Discounts r  •  •  •      _250jJ00 

825.00V 
$  6,867.75 

Charges  to  Income 

Interest  Expense  ?  700.00 

Sales  Discounts   lr067-75   1,767.75V 

Net  Profit    -      '      '     ^   5,100.00V 

I.    The  Report  Form  of  the  Profit  and  Loss  Statement 

Figure  1.     Tliis  is  a  generally  accepted  form  of  profit  and  loss  statement  and  is 

arranged  in  what  is  called  the  "Report"  form.    Notice  how  the  important  information 

is  arrived  at  in  a  step-by-step  order  and  how  the  amount  of  profit  (or  in  some  cases 

loss)  is  arrived  at  as  the  final  step  in  this  process. 

11.  DETAILS  OF  THE  PROFIT  AND  LOSS  STATEMENT 

Thus  far  you  have  considered  the  totals  as  thej''  appeared  in  the  state- 
ment. It  is  necessary  to  understand  how  these  totals  are  determind.  The 
profit  and  loss  statement  contains  four  general  sections,  each  of  which 
corresponds  to  each  of  the  four  factors,  in  determining  net  profit,  as  given 
on  page  1. 

Assignment  2,  Page  3 


1.  Sales 

2.  Cost  of  Goods  Sold 

3.  Operating  Expenses 

4.  Miscellaneous  Income  and  Expense 

When  Mr.  Johnson  studies  the  statement  for  the  purpose  of  controlling 
his  business,  the  detailed  information  of  each  section  is  very  important. 

Sales.  The  first  item  in  the  Sales  section  is  gross  sales.  From  this 
amount  is  deducted  the  total  sales  returned  for  which  customers  have  re- 
ceived credit  or  cash.  Sales  may  be  returned  because  the  goods  were  dam- 
aged in  transit,  were  of  short  weight,  of  different  grade  than  those  ordered, 
or  for  various  other  reasons.  The  total  sales  amounted  to  $70,141.22.  Of 
this  amount  $447.25  worth  of  goods  was  returned,  leaving  a  net  amount 
of  $69,693.97. 

A  clear  distinction  should  be  made  between  sales  returned  and  sales 
allowances.  Sales  returned  indicates  that  the  goods  were  actually  re- 
turned. Sales  allowances  means  that  the  customer  is  merely  allowed  credit, 
or  partly  reimbursed  with  cash,  and  does  not  return  the  goods.  During 
the  year  the  Johnson  Mercantile  Company  took  back  goods  worth  $447.25 
but  did  not  make  any  allowances  to  customers  for  goods  which  were  not 
returned.  Sales  allowances  would  be  deducted  from  total  sales  in  the  same 
way  as  sales  returned. 

Cost  of  Goods  Sold.  After  the  amount  of  net  sales  has  been  deter- 
mined, it  is  necessary  to  find  the  actual  cost  of  the  goods  sold.  This  figure 
is  determined  by  adding  the  net  purchases  to  the  inventory  at  the  begin- 
ning of  the  period  and  subtracting  the  inventory  at  the  end  of  the  period. 
The  inventory  at  the  beginning  of  the  period  is  called  "previous  inventory," 
and  the  inventory  at  the  end  of  the  period  is  called  "current  inventory." 
Mr.  Johnson  had  a  previous  inventory  of  $12,449.27.  During  the  year  he 
purchased  $46,0000.00  worth  of  goods,  of  which  amount  he  returned 
$1,000.00,  leaving  a  net  amount  of  purchases  of  $45,000.00.  If  he  had 
$12,449.27  worth  at  the  beginning  and  made  $45,000.00  net  purchases,  he 
will  have  a  total  of  $57,449.27  to  be  accounted  for.  Of  this  total,  $15,875.63 
still  remains  as  the  current  inventory.  By  subtracting  this  amount  from 
the  total  to  be  accounted  for,  you  can  determine  the  actual  cost  of  the 
goods  which  were  sold,  $41,573.64.  The  selling  price  was  $69,693.97 ;  the 
difference  between  these  two  amounts,  $28,120.33,  is  the  gross  profit. 

Operating  Expenses.  If  the  proprietor  of  a  business  owned  his  own 
store,  were  his  own  salesman  and  his  own  bookkeeper,  delivered  all  mer- 
chandise himself,  had  neither  taxes  nor  insurance  to  pay,  needed  no  light 
or  fuel,  and  made  no  repairs,  then  he  would  have  few  if  any  operating  ex- 
penses.   The  gross  profit  would  then  be  the  net  operating  profit. 

The  modern  proprietor,  however,  employs  salesmen  to  sell  goods, 
spends  money  for  advertising,  pays  an  accountant  to  keep  the  records,  and 
goes  to  still  further  expense  in  delivering  goods  to  customers.  He  also 
pays  for  heat,  light,  taxes,  insurance,  etc.  All  such  expenses  are  called 
operating  expenses,  because  they  result  from  the  trading  operations. 

Assignment  2,  Page  4 


Expenses  reduce  net  worth.  Incomes  increase  it.  Expense  is  an  outlay 
for  values  that  do  not  remain  long  in  the  business,  whether  paid  in  cash 
or  not. 

A  clear  distinction  should  be  made  at  this  point  between  expenses  for 
operating  the  business  and  "capital  expenditures,"  which  increase  the  in- 
vestment in  fixed  assets. 

For  example,  is  the  purchase  of  equipment,  such  as  an  office  desk,  a 
typewriter,  a  dictaphone,  filing  cases,  or  a  delivery  truck,  an  expense  ?  Or 
is  it  an  increase  of  investment?  Cash  may  be  paid  for  these  items:  in 
that  case  cash  is  decreased.  But  is  net  worth  decreased  as  well  ?  Not  un- 
less the  values  acquired  are  used  up,  that  is,  do  not  remain  in  the  business 
after  the  close  of  the  period.  Equipment  does  remain.  Purchases  of 
equipment,  therefore,  are  not  considered  as  expenses  but  as  capital  ex- 
penditures. 

The  operating  expenses  of  the  Johnson  Mercantile  Company  for  the 
year  1921  amounted  to  $22,077.58,  as  shown  on  the  profit  and  loss  state- 
ment. On  the  books  of  the  company  the  operating  expenses  are  classified 
into  three  groups: 

1.  Selling  Expenses 

2.  Administration  Expenses 

3.  General  Expenses 

The  total  for  each  of  these  groups  is  shown  on  the  statement. 

Selling  expenses  include  all  items  such  as  salesmen's  salaries,  delivery 
expenses,  loss  on  bad  debts,  expenses  for  window  decoration,  and  adver- 
tising. 

Under  administration  expenses  are  included  all  outlays  for  office  sal- 
aries and  office  expenses,  such  as  postage,  telephone,  stationery,  and 
supplies. 

Under  general  expenses  are  included  insurance,  taxes,  and  all  other  ex- 
penses which  are  necessary  in  operating  the  business  and  which  cannot 
be  charged  exclusively  either  to  selling  or  to  administration. 

On  the  books  of  the  company  a  separate  record  is  kept  for  each  of  these 
expenses,  so  that  at  the  end  of  the  period  they  can  be  shown  separately 
in  the  profit  and  loss  statement,  and  the  total  amount  for  operating  ex- 
penses be  determined.  The  total  operating  expense  is  then  deducted 
from  the  gross  profit  to  determine  the  net  operating  profit.  The  state- 
ment of  the  Johnson  Mercantile  Company  shows  a  net  operating  profit  of 
$6,042.75. 

Miscellaneous  Income  and  Expense.  The  profit  and  loss  statement  pro- 
vides a  separate  section  for  those  transactions  which  are  not  essential  to 
the  regular  trading  operations.  This  section  we  have  chosen  to  call  "mis- 
cellaneous" income  and  expense.  Other  names  may  also  be  used,  such  as 
financial,  incidental,  sundry,  other  income  and  charges  to  income,  non- 
operating,  etc. 

Assignment  2,  Page  5 


You  will  note  in  the  profit  and  loss  statement  of  the  Johnson  Mercan- 
tile Company  a  total  miscellaneous  income  of  $825.00.  The  detailed  items 
makin^up  this  total  are  also  shown.  Of  the  $825.00  total  extra  income, 
$40.00  was  interest  earned  on  notes  receivable.  Since  the  iDuilding  was  too 
large  for  the  immediate  use  of  the  company,  Mr.  Johnson  rented  out  a  part 
of  the  second  floor  to  a  firm  of  lawyers,  for  which  he  received  $360.00. 
Also  all  waste  paper,  collected  thruout  the  year,  was  sold  to  a  junk  dealer 
for  $50.00.  During  the  year  several  of  the  customers  used  the  company's 
truck  for  moving  their  household  goods,  and  for  this  service  the  company 
charged  $125.00.  All  these  transactions  were  outside  the  regular  business 
operations. 

The  company  fortunately  had  enough  cash  on  hand  to  take  advantage 
of  some  of  the  discounts  offered  on  goods  purchased,  and  thus  during  the 
year  saved  a  total  of  $250.00.  This  was  a  financial  earning  rather  than  a 
reduction  in  the  cost  of  goods  purchased.  These  purchase  discounts  should 
not  be  confused  with  purchase  allowances,  which  are  deducted  from  the 
total  purchases  in  the  "cost  of  goods  sold"  section. 

Naturally  there  were  expenses  as  well  as  earnings  outside  the  regular 
trading  operations.  The  total  of  these  expenses,  as  shown  on  the  state- 
ment under  the  heading  of  "Charges  to  Income,"  was  $1,767.75.  Of  this 
amount,  $700.00  was  interest  on  notes  payable  on  the  mortgage.  Cash 
discounts  amounting  to  $1,067.75  were  also  allowed  customers.  Some  ac- 
countants would  not  include  sales  discounts  under  miscellaneous  expense, 
but  would  deduct  them  from  sales  along  with  sales  allowances  and  returns. 
Later  in  the  course  this  point  will  be  treated  more  fully.  For  the  present, 
sales  discounts  are  considered  among  miscellaneous  expenses.  Sales  re- 
turns, and  sales  allowances  on  the  other  hand,  are  deducted  from  gross 
sales. 

The  $825.00  miscellaneous  income  and  $1,767.75  miscellaneous  expense 
will  result  in  a  reduction  of  the  profit  to  $5,100.00,  which  is  the  net  profit 
for  Mr.  Johnson's  business  during  1921. 

THREE  DIFFERENT  PROFIT  ITEMS 

You  no  doubt  have  already  noticed  that  there  are  three  different  profit 
items,  each  of  which  not  only  has  a  definite  place  in  every  profit  and  loss 
statement  but  also  affords  important  information  to  those  responsible  for 
the  success  of  a  business.  The  following  brief  statements  will  enable  you 
to  fix  these  three  profit  items  in  your  mind;  also  the  methods  by  which 
they  are  determined: 

Gross  Profit.  The  gross  profit  is  the  total  profit  before  any  expenses  are 
deducted. 

Net  Operating  Profit.  Net  operating  profit  is  the  gross  profit  less  the 
operation  expenses. 

Net  Profit.  The  net  profit  is  the  net  income  of  the  business  after  all 
operating  and  nonoperating  transactions  have  been  considered. 

Assignment  2,  Page  6 


The  profit  and  loss  statement  is  set  up  with  these  general  sections  and 
subdivisions  of  detailed  information  for  the  purpose  of  giving  Mr.  Johnson 
the  important  information  that  he  needs  in  order  to  determine  the  future 
policies  of  the  business.  The  arrangement  provides  an  intelligent  analysis 
of  business  operations.  Mr.  Johnson  is  interested  in  knowing  his  gross 
profit  as  related  to  sales,  his  net  operating  profit,  and  his  net  profit.  Hei 
can  compare  the  various  classes  of  operating  expenses  and  can  see  whether 
any  of  them  run  too  high  for  the  year  on  the  basis  of  sales.  He  can  also 
make  an  intelligent  study  of  the  miscellaneous  transactions  which  either 
increase  or  decrease  the  net  operating  profit  for  the  period. 

The  accountant  should  exercise  judgment  in  setting  up  a  profit  and  loss 
statement  and  always  have  in  mind  what  the  proprietor  of  the  business 
ought  to  know.  It  would  be  inadvisable  to  include  too  many  details,  be- 
cause this  would  make  the  statement  unnecessarily  lengthy.  Eiiough  de- 
tail, however,  should  be  included  to  support  the  totals  which  are  shown. 
The  statement  should  be  complete,  so  that  all  the  desired  information  is 
shown.  Careful  attention  should  also  be  given  to  the  heading  of  the 
statement. 

Proper  Heading  of  the  Statement.  The  profit  and  loss  statement  of  the 
Johnson  Mercantile  Company  is  headed  correctly.  The  name  of  the  busi- 
ness is  shown.  We  do  not  style  it  "Mr.  Johnson's  profit  and  loss  state- 
ment," because  this  is  a  profit  and  loss  statement  of  the  Johnson  Mercan- 
tile Company  only.    Mr.  Johnson  may  have  other  interests. 

The  most  common  heading  is  simply  "Profit  and  Loss  Statement."  You 
will  find  others  in  use,  however,  including: 

Statement  of  Profit  and  Loss 

Income  and  Profit  and  Loss  Statement 

Statement  of  Income  and  Profit  and  Loss 

Revenue  Statement 

Revenue  and  Expense  Statement 

Income  and  Expense 

The  accountant  should  select  a  name  which  best  suits  the  business  for 
which  he  is  making  a  statement.  A  railroad  prefers  the  term  "Revenue 
Statement"  or  "Income  Statement."  A  public  service  corporation  uses 
"Revenue  and  Expense  Statement."  Professional  businesses  and  clubs 
often  use  "Income  and  Expense,"  but  the  simple  heading  "Profit  and  Loss 
Statement"  you  will  find  is  adaptable  to  most  businesses. 

The  period  covered  by  the  statement  is  also  properly  shown  in  the 
heading.  A  single  date,  such  as  December  31,  1921,  would  be  misleading 
and  incorrect,  because  the  statement  covers  the  period  of  one  year  and  is 
not  merely  for  a  day.  You  would  not  date  a  profit  and  loss  statement,  then, 
in  the  same  way  that  you  date  a  balance  sheet,  which  may  be  dated  De- 
cember 31,  1921,  because  it  shows  the  facts  as  at  the  close  of  business  on 
that  particular  day.  The  profit  and  loss  statement,  on  the  other  hand, 
covers  a  period  which  must  be  indicated  on  the  statement. 

Assignment  2,  Page  7 


Having  considered  (1)  the  form  of  the  Profit  and  I.oss  Statement  and 
(2)  the  details  of  the  Profit  and  Loss  Statement  let  us  now  consider  sev- 
eral important  uses  of  the  Profit  and  Loss  Statement  in  business. 

in.    FIVE  IMPORTANT  USES  OF  THE  PROFIT  AND 
LOSS  STATEMENT 

1.  To  Determine  the  Turnover  of  Stock.  By  "turnover  of  stock"  is 
meant  the  number  of  times  that  the  average  inventory  is  turned  over  into 
cash  or  receivables  by  means  of  sales.  If  a  store  carries,  for  example,  an 
average  amount  of  stock  of  $1,000.00  during  the  year  and  sells  $10,000.00 
worth  of  goods  (value  figured  at  cost  price) ,  the  turnover  is  determined  by 
dividing  the  $10,000.00  by  $1,000.00.  In  this  case  the  turnover  would  be 
10.  The  average  amount  of  stock,  $1,000.00,  was  turned  over  ten  times  in 
the  course  of  the  year.  The  question  immediately  arises,  "How  can  one 
determine  the  average  amount  of  stock  carried  ?"  To  be  absolutely  correct, 
it  would  be  necessary  to  take  the  inventory  at  the  end  of  each  month,  add 
together  these  amounts,  and  divide  by  the  number  of  months  considered. 
Where  the  stock  does  not  vary  greatly  in  amount  from  one  month  to  an- 
other, however,  it  is  often  satisfactory  to  add  the  inventory  at  the  begin- 
ning and  the  inventory  at  the  end  of  the  year,  and  divide  by  2.  This  will 
give  the  average  inventory.  This  amount  is  then  divided  into  the  cost  of 
goods  sold.    The  quotient  is  the  turnover  for  the  year. 

Frequent  turnover  tends  to  increase  working  capital  and  makes  it  pos- 
sible for  a  man  to  run  his  business  with  a  minimum  of  borrowing.  Quick 
turnover  also  means  frequent  replacement  of  merchandise  and  a  fresh  and 
thus  more  salable  stock  at  all  times. 

Mr.  Johnson's  average  inventory  was  $14,162.45;  this  he  compared 
with  the  sales  to  determine  the  amount  of  turnover.  Since  the  inventory 
was  valued  at  cost  price,  it  was  necessary  to  figure  the  sales  at  cost  price 
also.  Therefore  he  took  the  cost  of  goods  sold  instead  of  the  sales.  $41,- 
573.64  divided  by  $14,162.45  equals  2.9,  the  rate  of  turnover.  After  assur- 
ing himself  that  his  stock  had  been  moving  satisfactorily,  Mr.  Johnson 
compared  the  figure  for  turnover  with  that  taken  from  last  year's  state- 
ment.   His  statement  for  1920  is  shown  in  Figure  2. 

From  the  profit  and  loss  statement  for  1920  ascertain  the  turnover 
by  the  same  method  which  we  used  in  determining  the  turnover  for  1921. 
You  will  find  that  the  turnover  for  1920  is  2.65.  The  turnover  for  1921 
we  found  to  be  2.9.  This  slight  increase  in  turnover  for  1921  indicates  a 
greater  business  activity  and  would  usually  indicate  also  a  larger  gross 
profit. 

Since  his  turnover  had  increased  somewhat  for  1921  over  that  of  1920, 
Mr.  Johnson  felt  that  he  was  approaching  the  normal  turnover  which  was 
to  be  expected  in  his  line  of  business. 

2.  To  Compare  Gross  Profit  with  Sales.  Mr.  Johnson  was  also  inter- 
ested in  knowing  whether  the  gross  profit  figure  was  increasing  or  decreas- 
ing.   The  gross  profit  for  1921  should  be  compared  with  the  net  sales  of 

Assignment  2,  Page  8 


Johnson  Uercantlle  Company 

PROFIT  AND  LOSS  STATEMENT 

Tor  year  ended  Dec.  31,  1920 

Sales 

Total  Sales   $51,371.14 

Less  Returned  Sales  560.00 

Net  Sales  $50,811.14 

Cost  of  Goods  Sold 

Inventory,  Jan.  1,  1920 $12,150.00 

Purchases "$35,000.00 

Less  Returned  Purchases   2.000.00 

Net  Purchases  35,000.00 

$45,150.00 

Less  Inventory,  Dec.  31,  .1920 12.449.27 

Cost  of  Goods  Sold 32.700.75 

Gross  Profit   $18,110.41 

Operating  Expenses 

Selling  Expenses  $7,210.12 

Administration  Expense  2,650.00 

General  Expenses  1.265.60 

Total  Operating  Expenses   11,125.72 

Net  Operating  Profit    $6,984.69 

Miscellaneous  Income  and  Expense 
Other  Income 

Interest    $150.00 

Purchase  Discounts   515.74     465.74 

$7,450.45 
Charges  to  Income 

Interest  Expense  §700.00 

Sales  Discounts   954.57   1,654.37 

Net  Profit  $5,796.06 

The  Profit  and  Loss  Statement  for  1920 
Figure  2.  Several  distinct  uses  for  the  profit  and  loss  statement  are  explained  in  detail 
in  this  lesson.  In  order  to  show  how^  each  use  works  out  in  actual  business  practice  the 
profit  and  loss  statement  of  the  Johnson  Mercantile  Company  is  referred  to  frequently 
in  the  explanations.  By  following  up  the  discussions  and  explanations  with  an  analysis 
of  the  statement  itself  the  real  importance  of  the  profit  and  loss  statement  to  any  busi- 
ness becomes  readily  apparent. 

that  year,  and  the  gross  profit  for  1920  with  the  net  sales  for  that  year. 
Taking  the  two  statements  of  the  Johnson  Mercantile  Company,  what  per 
cent  of  sales  is  the  gross  profit  in  each  case?  In  1920,  gross  profit  $18,- 
110.41  -^  net  sales  $50,811.14=35.6  per  cent.  In  1921,  gross  profit  $28,- 
120.33  -f-  net  sales  $69,693.97=40.3  per  cent.  Evidently  gross  profit  had 
increased  4.7  per  cent,  which  means  that  Mr.  Johnson  made  almost  5  cents 
more  gross  profit  on  every  dollar  of  sales  in  1921  than  in  1920. 

Assignment  2,  Page  9 


3.  To  Compare  Net  Operating  Profits  with  Sales.  The  net  operating 
profit  is  the  amount  left  after  operating-  expenses  have  been  deducted  from 
gross  profit.  In  other  words,  the  net  operating  profit  represents  the  real 
earning  power  of  the  business.  In  1921  the  net  operating  profit  was 
$6,042.75  or  8.6  per  cent  of  sales.  In  1920  the  net  operating  profit  was 
$6,984.69,  or  13.7  per  cent  of  sales.  The  operating  profit  had  dropped  5.1 
per  cent  even  though  there  was  a  4.7  per  cent  increase  in  gross  profit. 

Comparison  of  the  two  statements  discloses  that  expenses  for  1920 
are  21.9  per  cent  of  sales  and  for  1921,  31.7  per  cent,  an  increase  of  9.8i 
per  cent.  This  increase  in  operating  expenses  wiped  out  the  4.7  per  cent 
increase  in  gross  profit  and  left  a  5.1  per  cent  decrease  in  net  operating 
profit.  By  comparing  the  selling  expenses  with  the  sales  for  1921,  Mr. 
Johnson  found  that  these  expenses  had  been  too  high  and  would  have  to 
be  cut  down.  You  can  prove  this  for  yourself  by  using  percentages.  (Td 
determine  what  percentage  one  number  is  of  another,  divide  the  first  by 
the  second.)  He  also  found  thru  comparison  that  the  administration  and 
general  expenses  had  been  excessive,  making  it  necessary  for  him  to 
manage  his  business  more  economically  in  the  future. 

4.  To  Determine  the  Percentage  of  Net  Profit.  In  1920  the  net  profit 
was  $5,796.06,  or  11.4  per  cent  of  net  sales.  In  1921  the  net  profit  wa3 
$5,100.00  or  7.3  per  cent  of  sales.  This  decrease  of  4.1  per  cent  in  net 
profit  when  gross  profit  showed  an  increase  of  4.7  per  cent  is  also  explained 
by  the  high  operating  costs. 

5.  To  Determine  the  Effect  of  Miscellaneous  Income  and  Expense. 

Because  of  the  higher  operating  costs  during  1921,  Mr.  Johnson  endeavored 
to  increase  his  income  for  that  year  and  thus  offset  in  part  the  decrease) 
in  net  profit.  This  accounts  for  certain  additional  items  in  the  1921  state- 
ment. 

In  1921  the  miscellaneous  income  was $825.00 

In  1920  the  miscellaneous  income  was 465.74 

Increase - $359.26 


With  this  increase  in  income,  compare  his  increase  in  miscellaneoua 
costs  also. 

In  1921  the  miscellaneous  costs  were $1,767.75 

In  1920  the  miscellaneous  costs  were 1,654.37 

Increase $    113.38 

The  increase  in  income  was  $359.26;  the  increase  in  cost  was  $113.38. 
There  was  thus  a  net  increase  in  miscellaneous  income  for  1921  of  $245.88. 

Profit  and  Loss  Statement  a  Progress  Report.  In  Assignment  1  we 
learned  that  while  the  balance  sheet  was  the  barometer  by  which  a  busi- 
ness could  be  judged  as  to  its  financial  standing,  it  afforded  little,  if  any, 
definite  information  as  to  the  progress  a  business  was  making.  The  profit 
and  loss  statement  supplies  this  progress  information  because  it  indicates 

Assignment  2,  Page  10 


Johnson  Mercantile  Company 

PROFIT  AND  LOSS  STATEMENT 

For  year  ended  Dec.  31,  1921 

Sales 

Total  Sales  $70,141.22 

Less  Returned  Sales 447.25 

Net  Sales  $69,693.97 

Cost  of  Goods  Sold 

Inventory,  Jan.  1,  1921  $12,449.27 

Purchases  $46,000.00 

Less  Returned  Purchases 1,000.00 

Net  Purchases  45,000.00 

$57.449.27 

Less  Inventory,  Dec.  31,  1921 ,^5,875.63_> 

Cost  of  Goods  Sold /VTr. ...  .vrT  41 ,  575 .  64 

Gross  Profit ./. $28,120.33 

Operating  Expenses 

Selling  Expenses  /....  $11,515.40 

Administration  Expenses  / 4,190.15 

General  Expenses  /. 6,372.05 

Total  Operating  Expenses « 22^^77^58 

Net  Operating  Profit  ./ $  6,042.75 

Miscellaneous  Income  and  Expense 
Other  Income 

Interest  Earned  / $  40.00 

Rent  Received  ./. 360.00 

Sales  of  Waste  Paper  / 50.00 

For  Use  of  Truck  by  Customers  /. 125.00 

Purchase  Discounts  /. 250.00 

825.00 

6,867.75 

Charges  to  Income 

Interest  Expense  /. $   700.00 

Sales  Discounts  /. 1,067.75 

.  1.767.75 

Net  Profit  , /. /$"  5 ,  100. 00 


Cash  /$  5,450.10 

Accounts  Receivable  I  13,404.35 

Notes  Receivable  2.500.00 

Merchandise  Inventory (/0.5.875.65') 

Total       f^^-i-n-r\t^^n*         Aoock+c?  • ^ 


Fixed  Assets 

Furniture  and  Fixtures    ...    $  4,500.75 

Delivery  Equipment    2.100.00 

Buildings    15,000.00 

Land 5,500.00 

Total  Fixed  Assets   27,100.75 


The  Tie-up  Between  the  Profit  and  Loss  Statement  and  the  Balance  Sheet 

Figure  3.    It  is  a  significant  fact  that  there  is  scarcely  a  form  or  statement  which  an 

accountant  is  required  to  make  up  which  hasn't  some  relation  to  other  entirely  different 

forms  or  statements.    Here,  for  instance,  we  find  that  the  balance  sheet  is  tied  up  with 

the  profit  and  loss  statement  by  the  net  profits  and  current  inventory  items. 


Assignment  2,  Page  ll 


whether  a  business  has  been  going  ahead  or  falHng  behind.    It  may  well 
be  called  the  progress  report  of  a  business. 

How  Mr.  Johnson  Interprets  the  Statement.  That  the  profit  and  losd 
statement  is  really  a  progress  report  of  business  is  well  illustrated  by  thq 
following  conclusions  Mr.  Johnson  made  from  his  profit  and  loss  statement 
with  reference  to  the  gi'owth  of  his  business: 

1.  His  business  had  a  fairly  good  turnover  and  showed  an  increase  of  gross  profit. 

2.  Operating  expenses  had  reduced  this  profit  and  therefore  needed  closer  control 
in  the  future. 

3.  His  policy  of  bringing  in  extra  earnings  was  good,  because  it  helped  to  increase 
the  net  profit. 

4.  Finally,  he  was  convinced  that  it  would  be  better  to  have  a  profit  and  loss  state- 
ment every  six  months  instead  of  only  once  a  year;  thus  he  could  check  up  on 
his  expenses  more  often  and  catch  any  losses  before  they  could  reach  a  large 
total. 

Relation  of  Profit  and  Loss  Statement  to  Balance  Sheet.  There  are 
only  two  items  that  appear  in  both  the  profit  and  loss  statement  and  the 
balance  sheet,  viz.,  net  profit  and  current  inventory.  The  current  inven- 
tory is  an  asset ;  it  is  also  shown  in  the  "Cost  of  Goods  Sold"  section  of  the 
profit  and  loss  statement.  The  net  profit  figure  does  not  always  appear  on 
the  balance  sheet  as  a  separate  item.  It  may  be  merged  in  the  Surplus 
Account  on  the  balance  sheet  of  a  corporation,  or  it  may  be  shown  in  total 
with  the  net  worth,  in  the  case  of  a  proprietorship.  Figure  3  shows  how 
the  profit  and  loss  statement  and  the  balance  sheet  are  tied  together  by 
the  Net  Profit  and  Current  Inventory  Accounts. 

In  later  assignments  you  will  find  that  "balance  sheet  items"  and 
"profit  and  loss  items"  are  referred  to  frequently.  There  is  a  fundamental 
diff"erence  between  the  two  which  will  be  clear  if  you  just  bear  in  mind 
that  the 


Balance  Sheet  contains 

Assets 
Liabilities 
Net  Worth 

and  reflects  the  financial  condition  of  a  business;   while  the 


Profit  and  Loss  Statement  contains  the 

Sales  (and  Returned  Sales) 

Purchases  (and  Returned  Purchases) 

Gross  Profit 

Expenses 

Net  Operating  Profit 

JVIiscellaneous  Income  and  Expense 

and  reflects  the  progress  made  by  the  business. 
Assignment  2,  Page  12 


THE  IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

First — That  the  primary  purpose  of  the  profit  and  loss  statement  is  to 
determine  whether  the  business  has  made  process  and  how  much, 
and  that  this  progress  or  lack  of  progress  is  expressed  in  terms  of 
net  profit  or  net  loss. 

Second — That  in  determining  this  net  profit  or  loss  the  accountant  must 
consider  four  things: 

1.  Income  from  sales,   by  distinguishing  between  gross  sales  and 
net  sales. 

2.  Cost  of  goods  sold,  in  order  to  arrive  at  gross  profit  or  gross  loss. 

3.  Operating  expenses,  to  be  deducted  from  gross  profits. 

4.  Miscellaneous  transactions  outside  of  regular  operations,  in  order 
to  arrive  at  net  profit. 

Third — There  are  two  classes  of  expenditures:  operating  expenses, 
which  decrease  the  profit  and  are  known  as  "profit  and  loss  items," 
and  capital  expenditures,  which  increase  the  value  of  fixed  assets 
and  are  known  as  "balance  sheet  items." 

Fourth— That  the  profit  and  loss  statement  is  a  very  important  report, 
because  it  gives  the  head  of  a  business  the  following  important  in- 
formation: 

1.  The  rate  of  stock  turnover. 

2.  The  relation  of  gross  profit  to  net  sales. 

3.  The  relation  of  net  operating  profit  to  sales. 

4.  What  the  percentage  of  net  profit  is  to  sales. 

5.  The  effect  of  miscellaneous  income  and  expense  on  net  profit. 


(Problems  on  next  page) 


Assignment  2,  Page  13 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  2 

The  following  problems  taken  from  actual  business  operations  will 
give  you  practice  in  applying  the  principles  of  this  assignment. 

Observe  carefully  all  instructions  which  have  been  given  you,  and 
send  in  carefully  prepared  solutions  to  each  of  the  following  four  problems : 

1.  Mr.  J.  F.  Cook  owns  a  grocery  store.  You  are  asked  to  give  him 
the  amount  of  turnover  and  the  gross  profit  for  the  year  1921. 

These  are  the  facts  that  you  find  on  looking  over  the  books :  Decem- 
ber 31,  1921: 

Total  Sales „ $12,000.00 

Returned  Sales  ...„ 250.00 

Inventory,  Jan.  1 1,800.00 

Purchases  During  Year „ 9,200.00 

Inventory,  Dec.  31 2,270.00 

(a)  Calculate  the  turnover 

(b)  What  is  the  amount  of  the  gross  profit? 

(c)  The  gross  profit  is  what  per  cent  of  net  sales? 

2.  Mr.  C.  L.  Thomas  is  the  proprietor  of  a  small  jewelry  store.  Hisi 
gross  profit  for  the  month  of  January,  1922,  amounts  to  $800.00.  His 
operating  expenses  for  January  include: 

Salaries  $205.00 

Rent  65.00 

Heat  31.00 

Light 14.25 

Insurance    12.00 

Advertising 17.60 

(a)  What  is  his  net  operating  profit  for  January,  1922? 
Here  are  other  facts  that  have  to  do  with  Mr.  Thomas'  business: 

Purchase  Discounts $  86.00 

Sales  Discounts  106.00 

Interest  Paid  on  Notes „ 340.00 

Interest  Received   116.00 

Received  from  Sale  of  Empty  Boxes 11.00 

Donation  to  Business  Club 20.00 

(b)  What  is  Mr.  Thomas'  net  profit  for  January,  1922? 

3.  On  November  1,  1921,  Mr.  T.  H.  Black  began  a  retail  drug  busi- 
ness. He  had  no  stock  on  hand  to  begin  with.  During  November  he 
bought  $8,000.00  worth  of  drugs,  and  his  sales  amounted  to  $2,500.00. 
On  November  30  he  has  $6,575.00  worth  on  hand.  His  expenses  for 
November  amounted  to  $200.00. 

(a)  How  much  has  he  lost  or  gained  from  the  month's  business? 

(b)  During  the  month  of  December  he  bought  show  cases  and  an 
office  desk.  Are  these  purchases  operating  expenses  or 
capital  expenditures  ?    State  the  reason  for  your  answer. 

Assignment  2,  Page  14 


4.  The  Northwestern  Coal  Company  asks  you  to  make  a  profit  and 
loss  statement  for  the  year  1921.  The  books  show  the  following  facts  on 
December  31,  1921 : 

Cash  on  Hand..._ _ _ _...$  5,100.00 

Sales  78,000.00 

Inventory  Dec.  31,  192l..._ „.  4,000.00 

Mortgage  Payable  _ 1,500.00 

Purchases       47,000.00 

Yards  and  Sheds 16,000.00 

Sales  Discounts „ 2  510.00 

Notes  Payable „ _.'.'.7."""Z".'."  sioooioo 

Salesmen's  Salaries 4,300.00 

Office  Salaries  ""  3^000.00 

Accounts  Receivable  5,200.00 

Interest  Earned  160.00 

Accounts  Payable  ...„ _ 6,OOo!oO 

Inventory  Jan.  1,  1921 _.  2,000.00 

Notes  Receivable  „ 3,200  00 

Equipment  _ „ 8i500.'00 

Purchase  Allowances 1,600.00 

Loss  on  Bad  Debts "!!!""...  1,200.00 

Delivery  Expenses  sIsOO.OO 

Yard  Labor  „ „ 2,500.00 

Advertising 1,000.00 

bales  Allowances  1  500  00 

Taxes    275*.00 

Insurance  590.00 

Interest  Paid  „ 370  00 

Capital,  Jan.  1,  1921 _ _ "]  22,485.00 

(a)  Send  in  the  profit  and  loss  statement  for  1921. 

(b)  Present  a  list  of  all  the  items  that  should  be  shown  on  the 
balance  sheet,  December  31,  1921.  Make  two  columns,  one 
for  the  assets  and  the  other  for  the  liabilities  and  net  worth. 


Assignment  2,  Page  15 


Higher  Accountancy 

ai  lo 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  3 

THE  GENERAL  LEDGER 


COMPETITION  is  so  keen  to-day  that  only  the  well- 
intormed  person  can  hope  to  draw  ahead  of  the 
crowd.  No  corporation,  no  firm  wants  an  ignorant  em- 
ploye for  a  responsible  position. 

It  may  require  effort,  it  may  require  rigid  self-discipline,  it 
may  require  painful  self-denial  to  switch  from  careless,  idle 
habits  to  a  course  of  study.  But  very  soon  the  pleasure 
derived  from  good  habits  will  immeasurably  outweigh  the 
false  pleasure  derived  from  bad  habits. 

From  Forbes  Magazine 


LaSalle  Extension  University 

Chicago 


NHA-3 

(1-53) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All   Countries 

LaS.^lle  Extensiox  University 

Printed  in  tJie  U.  S.  A. 


THE  GENERAL  LEDGER 

THE  DOUBLE-ENTRY  PRINCIPLE— THE  TRIAL  BALANCE 

You  are  now  familiar  with  the  balance  sheet  and  the  profit  and  loss 
statement,  and  understand  their  great  value  to  those  in  charge  of  the 
direction  of  business  affairs. 

Of  course,  if  these  reports  are  to  be  safe  guides  in  the  management 
of  business,  thej^  must  be  accurate ;  that  is,  they  must  summarize  without 
error  the  vast  number  of  individual  transactions  of  all  kinds  that  occur 
thruout  the  year. 

We  have  said  nothing  as  yet  about  how  these  business  transactions 
are  classified  and  summarized.  It  has  been  our  purpose  up  to  this  time 
to  make  clear  to  you  the  important  business  summaries — statements — 
with  which  all  business  men  should  be  familiar. 

In  this  assignment  you  will  see  how  business  transactions  are  classified 
and  summarized  by  means  of  a  device  called  an  "Account."  The  nature 
of  tlie  account  will  be  made  clear,  and  you  will  see  also  that  the  Ledger,  a 
book  of  which  you  have  often  heard,  is  simply  a  book  which  contains  these 
accounts. 

Why  Business  Transactions  Must  Be  Classified.  You  no  doubt  have 
noticed  the  straight  rows  of  lumber  piled  in  the  well-organized  lumber 
yard.  Each  pile  represents  a  different  size  and  grade  of  lumber;  when 
the  yardmen  fill  an  order,  there  is  no  confusion  or  delay,  because  they 
know  just  where  to  go  to  get  each  size  and  grade.  And  they  can  do  this, 
simply  because  the  lumber  as  it  was  brought  into  the  yard  was  piled  where 
it  belonged.    In  other  words,  it  was  classified  according  to  size  and  grade. 

The  accountant  classifies  business  transactions  in  much  the  same  way. 
For  example,  he  records  his  cash  transactions  together  in  one  place,  his 
notes  receivable  in  another,  his  accounts  payable  in  still  another  place, 
and  so  on.    Each  of  these  gi'oups  he  calls  an  account. 

Then  when  he  wants  certain  information,  or  when  at  the  end  of  the 
month  he  wants  to  set  up  his  balance  sheet  and  profit  and  loss  state- 
ment, he  will  know  exactly  where  to  turn  in  order  to  get  this  informa- 
tion, because  he  was  careful  to  make  the  right  classification  when  he  re- 
corded the  transaction. 

What  Is  an  Account?  Broadly  speaking,  an  account  is  a  record  in  the 
ledger  of  similar  business  transactions.  For  instance,  the  Accounts  Re- 
ceivable Account  is  a  record  of  the  total  amount  of  money  which  customers 
owe  a  business  on  open  account.  The  Notes  Payable  Account  is  a  similar 
record  of  the  notes  which  the  business  has  given  to  outsiders.    The  Cash 


Account  is  a  record  of  cash  received  and  cash  paid  out.  And  so  on.  Ac- 
counts will  be  few  or  many,  according  to  the  nature  and  size  of  the  busi- 
ness and  the  need  for  detailed  information  by  those  who  direct  its  affairs. 

HOW  LEDGER  ACCOUNTS  ARE  DIVIDED 

Ledger  accounts  are  usually  divided  into  two  general  classes,  "real" 
and  "nominal." 

Real  Accounts.  The  real  accounts  include  Assets,  Liabilities,  and  Capi- 
tal, which  are  real,  permanent,  and  independent  values.  Such  accounts 
are  also  called  balance  sheet  accounts,  because  they  appear  on  the  balance 
sheet.  For  example.  Cash,  Notes  Receivable,  Notes  Payable,  Inventory, 
etc.,  are  all  real  accounts. 

Nominal  Accounts.  The  word  "nominal"  as  applied  to  accounts  to  dis- 
tinguish them  from  "real"  accounts,  does  not  mean  that  the  nominal  ac- 
counts are  "unreal."  "Nominal"  is  used  in  the  sense  of  "temporary,"  to 
show  that  such  accounts  are  not  permanent.  For  instance,  Sales,  Pur- 
chases, Expenses,  and  Income  are  nominal  accounts.  In  these  accounts 
are  recorded  all  increases  and  decreases  of  net  worth;  in  other  words,  all 
profits  and  losses.  These  nominal  accounts  exist  only  during  the  account- 
ing period,  at  the  end  of  which  they  are  summarized,  and  the  net  result, 
whether  a  profit  or  a  loss,  is  transferred  to  the  Proprietor's  Account. 
Nominal  accounts  are  also  called  profit  and  loss  statement  accounts,  since 
they  appear  on  the  profit  and  loss  statement. 

The  Standard  Form  of  an  Account.  The  pages  of  the  ledger  are  ruled 
according  to  a  standard,  of  which  Figure  1  is  a  reproduction  in  skeleton 
form. 

NAME  OF  ACCOUNT 


DATE  ITEMS  Folio  AMOUNT 


DATE  ITEMS  Folio  AMOUNT 


Skeleton  Form  of  an  Account 

Figure  1.    This  represents  merely  a  skeletonized  form  of  the  layout  of  a  ledger  page. 
It  is  reproduced  to  show  the  divisions  and  subdivisions  of  a  standard  form  of  account. 

The  name  of  the  account  should  be  written  on  the  top  line.  For  in- 
stance, if  $50.00  was  paid  out  for  rent,  that  amount  would  be  entered  in 
the  account  headed  "Expense."  If  merchandise  was  purchased  on  account, 
the  amount  would  be  entered  under  the  account  headed  "Purchases,"  etc. 
In  the  case  of  each  transaction,  of  course,  another  account  is  affected,  as 
will  be  explained  later  in  the  assignment. 

The  vertical  line  divides  the  form  into  a  right  and  left  side.  Under 
"Date"  is  recorded  the  year,  month,  and  day  of  the  transaction;    under 

Assignment  8,  Page  2 


"Items,"  a  brief  explanation  of  the  nature  of  the  transaction,  and  under 
"Amount,"  the  exact  amount  of  money  involved  in  the  transaction.  In 
the  "Folio"  column  is  to  be  entered  the  number  of  the  page  in  the  journal 
from  which  the  entry  was  transferred  to  the  ledger.  The  use  of  this  col- 
umn will  be  explained  more  fully  when  we  explain  the  journal  in  detail. 

The  standard  form,  as  you  will  find  it  in  the  ledger,  is  reproduced  in 
Figure  2.  It  has  the  same  general  make-up  as  the  skeleton  form  except 
that  columns  have  been  added  to  assist  in  wTiting  in  and  in  reading  the 
amounts  and  other  data.  The  heading  of  the  amount  column  on  the  left 
has  been  changed  to  "Debits,"  while  on  the  right  side  it  has  been  changed 
to  "Credits." 

NAME  OF  ACCOUNT 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

— 





— 



— 





— 



— 



— 





— 

The  Standard  Form  of  an  Account 

Figure  2.    The  standard  layout  of  any  ledger  page  is  essentially  the  same  as  shown 

here.    Notice  how,  by  ruling  off  the  columns  and  substituting  the  words  "debits"  and 

"credits"  where  the  word  "amount"  appeared  in  the  skeletonized  form,  a  definite  place 

is  provided  for  every  bit  of  information  about  the  transaction. 

What  Is  Meant  by  "Debit."  Whenever  we  enter  a  transaction  on  the 
left  side  of  an  account,  we  debit  the  account.  The  amount  is  therefore  d, 
debit  item  and  is  entered  in  the  column  headed  "Debits."  The  term 
"charge"  is  commonly  used  by  accountants  as  a  synonym  for  "debit." 

What  Is  Meant  by  "Credit."  Whenever  we  enter  a  transaction  on  the 
right  side  of  an  account,  we  speak  of  crediting  the  account.  The  amount 
is  said  to  be  a  credit  and  is  entered  in  the  column  headed  "Credits." 

To  make  this  perfectly  clear,  compare  the  ordinary  expressions  with 
the  accountant's  terms  as  given  below. 


The  layman  uses  these  expressions : 

1.  Place  the  amount  of  $10  on  the 
left  side  of  the  Cash  Account. 

2.  This  item  is  one  which  must  be 
placed  on  the  left  side  of  an  ac- 
count. 

3.  In  the  Cash  Account  the  left  side 
will  usually  be  greater  than  the 
right  side. 


The  accountant  says: 

1.  Debit,  or  charge,  $10.00  to  Cash 
Account. 

2.  This  is  a  debit  item,  or  this  is  a 
charge. 

3.  The  Cash  Account  has  a  debit 
balance. 


Assignment  3,  Page  3 


Increases  and  Decreases  in  Accounts.  This  debit  and  credit  system 
forms  the  basis  of  sound  accounting.  It  offers  a  more  convenient  form  of 
recording  increases  and  decreases  and  requires  less  time,  but  it  does  much 
more  than  that,  it  affords  numerous  checks  and  safeguards  which  reduce 
to  a  minimum  the  chances  of  loss  thru  the  inevitable  errors  of  clerks. 

Figure  3  is  a  Cash  Account  with  transactions  entered  according  to  this 
debit  and  credit  method. 

CASH 


DATE 

ITEMS 

Pol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1922 
Jan. 

3 

Investment 

2000 

00 

1922 
Jan. 

5 

Furniture 

1000 

GO 

Jan. 

12 

Bank 

1500 
400 

00 
00 

Jan. 

6 

Rent 

60 

00 

Jan. 

24 

Customer 

Jan. 

17 
18 

Salary 

70 

00 

Jan. 

Fuel 

50 

00 

00 

Jan. 

31 

Balance 

2720 

00 
00 

3900 

3900 

The  Cash  Account 

Figure  3.    Notice  that  the  original  investment  and  all  the  cash  received  by  this  business 
is  "debited"  (entered  on  the  debit  side).     All  cash  paid  out  is  credited   (entered  on 

credit  side). 

Convenience  of  the  "Debit"  and  "Credit"  System.  In  order  to  show 
that  the  debit  and  credit  method  is  more  convenient  and  that  it  is  a  time- 
saver,  let  us  find  the  balance  of  the  above  Cash  Account  in  the  ordinary 
way.  In  order  to  do  this,  we  must  add  every  increase  and  subtract  every 
decrease.     The  long-strung-out  calculations  would  be  as  follows: 

Jan.    3     Original  Investment  $2,000.00 

5  Paid  Out  for  Office  Furniture 1,000.00 

Balance  on  Hand $1,000.00 

6  Paid  Out  for  Rent 60.00 

Balance  on  Hand $    940.00 

12     Received  from  Bank 1,500.00 

Balance  on  Hand $2,440.00 

17  Paid  Out  for  Clerk's  Salary 70.00 

Balance  on  Hand $2,370.00 

18  Paid  Out  for  Fuel 50.00 

Balance  on  Hand $2,320.00 

24    Received  from  Customer 400.00 

31     Balance  on  Hand $2,720.00 

Assignment  3,  Page  4 


Obviously  it  is  much  easier  and  simpler  to  subtract  the  sum  of  the 
"credits"  from  the  sum  of  the  "debits"  as  in  Fi^re  3. 

Increases  Not  Always  on  Debit  Side.  From  the  Cash  Account  used 
here  as  an  illustration  you  might  be  led  to  think  that  all  accounts  are  in- 
creased on  the  debit  side  and  decreased  on  the  credit  side.  This  is  not  the 
case,  however.  Only  the  following  accounts  are  increased  by  debit  entries : 
Assets,  Expenses,  and  Purchases.  On  the  other  hand,  all  Liability  ac- 
counts, Capital,  Sales,  and  other  Income  accounts,  are  credited  with  in- 
creases and  debited  with  decreases.  The  chart  shown  in  Figure  4  will 
explain  this  statement  more  fully: 


All  Asset, 
Expense,  and 
Purchases  Accounts  are 


INCREASED 
on  left 
side  by 
debits 


DECREASED 
on  right 
side  by 
credits 


HAVE  DEBIT  BALANCES 


All  Liability, 

Capital, 

Sales,  and  Income  Accounts  are 


DECREASED 
on  left 
side  by 
debits 


INCREASED 
on  right 
side  by 
credits 


HAVE  CREDIT  BALANCES 


Figure  4.    This  chart  will  help  you  to  fix  in  your  mind  just  which  accounts  are  increased 

on  the  debit  side  and  which  accounts  are  increased  on  the  credit  side.     The  former 

accounts  normally  have  debit  balances,  the  latter  credit  balances. 


SELF-TEST  PROBLEMS 

In  order  to  understand  better  this  basic  principle  of  double  entry  ac- 
counting— of  how  assets,  expenses,  and  purchases  are  increased  by  debits 
and  decreased  by  credits,  and  how  liabilities,  capital,  sales,  and  income  are 
credited  with  increases  and  debited  with  decreases — analyze  the  accounts 
of  Frank  Brown  listed  in  Figure  5  as  they  appear  on  his  ledger  Jan. 
31,  1922. 

LEDGER  ACCOUNTS   (Frank  Brown) 
CASH 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1922 

Jan. 

3 

Original  Capital 

2000 

00 

1922 
Jan. 

5 
6 

Office  Furniture 

1000 

00 
00 

12 

Notes  Payable 

1500 

00 
00 

Rent 

60 

24 

Accounts  Receivable 

400 

17 

Clerk's  Salary 

70 

00 

18 

Fuel 

50 

00 

(Continued  on  next  page.) 


Assignment  3,  Page  5 


OFFICE  FURNITURE 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CRED 

ITS 

1922 
Jan. 

5 

Cash 

1000 

00 

1922 

■ 

ACCOUNTS  RECEIVABLE 


1922 
Jan. 

21 

Smith  &  Wells 

700 

00 

1922 
Jan. 

24 

Cash,  Smith  &  Wells 

400 

00 

30 

Jones  &  Company 

400 

00 

NOTES  PAYABLE 


1922 

— 

1922 
Jan. 

12 

Cash,  Bank 

1500 

00 
00 

— — 

19 

Accounts  Payable 

300 

ACCOUNTS  PAYABLE 


1922 
Jan. 

19 

Notes  Payable 

300 

00 

1922 
Jan. 

10 

Merchandise  Purchased 

500 

00 

16 

Merchandise  Purchased 

200 

00 

PURCHASES 


1922 
Jan. 

10  Accounts  Payable 

500 

00 

1922 

16  Accounts  Payable 

200 

00 

SALES 


1922 

1922 
Jan. 

21 

Accounts  Receivable 

- 

700 

00 

30 

Accounts  Receivable 

400 

00 

Assignment  3,  Page  6 


{Continued  on  next  page.) 


EXPENSES 


DATE 

ITEMS 

Fol. 

/ 

DEBITS 

DATE 

ITEMS 

Pol. 

v/ 

CREDITS 

1922 
Jan. 

6 

Cash,  Rent 

60 

00 

1922 

17 

Clerk's  Salary 

70 

00 

— 

18 

Fuel 

50 

00 

PROPRIETOR'S  CAPITAL 

(Frank  Brown) 

1922 

— 

- 

1922 
Jan. 

3 

Cash  Invested 

2000 

00 

Ledger  Accounts 

Figure  5.  The  ledger  accounts  of  Frank  Brown  as  listed  here  will  give  you  an  oppor- 
tunity to  check  up  on  your  understanding  of  the  statement,  that  increases  are  not 
always  shown  on  the  debit  side  of  the  account.  Analyze  these  accounts  and  pick  out 
those  that  have  increases  on  the  left  side  and  decreases  on  the  right  side.  In  that  way 
you  will  be  able  to  tell  whether  you  have  grasped  the  full  significance  of  the  statement. 

We  have  already  explained  that  the  Cash  Account  is  increased  on  the 
left  side  and  decreased  on  the  right  side. 

On  January  5,  furniture  was  purchased,  and  so  the  account  must  show 
the  increase.  Notice  that  the  increase  is  shown  by  a  debit  in  the  Office 
Furniture  Account,  since  the  account  is  an  asset. 

The  same  is  true  of  Accounts  Receivable,  which  was  increased  because 
Smith  &  Wells  bought  $700.00  worth  of  merchandise  on  account  on  Janu- 
ary 21.  This  increase  is  debited.  Later  Smith  &  Wells  paid  $400.00  cash 
on  their  account,  which  reduced  Accounts  Receivable.  This  reduction  is 
shown  by  a  credit.  On  January  30,  Jones  &  Company  bought  merchandise 
for  $400.00  on  account.  Since  Accounts  Receivable  is  increased,  the  ac- 
count is  debited. 

Notes  Payable  and  Accounts  Payable  are  both  liability  accounts,  and 
therefore  have  all  increases  on  the  credit  side.  On  January  12,  $1,500.00 
was  borrowed  from  the  bank;  on  January  10  and  on  January  16,  mer- 
chandise was  purchased  on  account;  on  January  19,  Brown  gave  a  note 
for  $300.00,  thus  increasing  his  Notes  Payable  and  decreasing  the  Accounts 
Payable.    These  increases  are  credited,  and  the  decrease  is  debited. 

THE  DOUBLE-ENTRY  METHOD  EXPLAINED 

Every  business  transaction  is  twofold  in  its  nature — values  are  received 
and  values  are  given ;  it  is  for  this  reason  we  use  the  term  "double  entry" 
method.  In  Frank  Brown's  ledger  you  will  notice  that  each  entry  is  offset 
by  another  entry  of  exactly  equal  amount  under  the  same  date. 


Assignment  3,  Page  7 


The  governing  principle  in  double  entry  is  the  maintaining  of  a  balance 
in  the  ledger.  This  you  cannot  accompHsh  unless  the  credit  side  of  every 
transaction  is  exactly  offset  by  the  debit  side.  For  example,  when  you  sell 
merchandise  valued  at  $100.00  for  cash  the  transaction  would  be  analyzed 
thus: 

Debit  Cash  Account  $100.00.    Credit  Sales  Account  $100.00. 

Thus  a  business  transaction  is  an  exchange  of  equal  values,  and  it  is 
necessary  to  show  this  twofold  effect  of  every  transaction  in  the  ledger. 

If  you  pay  $50.00  rent  for  a  store,  you  part  with  the  cash  and  in  return 
receive  the  use  of  the  store.  The  accounts  Cash  and  Expense  are  affected. 
Cash  is  decreased,  because  cash  is  paid  out.  Expense  is  increased.  There- 
fore :  Expense  Account  is  debited  $50.00.  Cash  Account  is  credited  $50.00. 

Analysis  of  Business  Transactions.  The  following  four  questions  must 
be  asked  and  answered  about  each  business  transaction  before  it  can  be 
correctly  classified  and  recorded  in  the  accounts. 

1.  What  accounts  are  affected  by  the  transaction? 

2.  Are  these  accounts  increased  or  decreased? 

3.  Which  side  of  these  accounts  records  increases,  and  which  records 
decreases  ? 

4.  Which  account  shall  be  debited  and  which  credited  as  a  result? 

In  the  ledger  accounts  of  Frank  Brown  which  are  shown  in  Figure  5, 
twelve  business  transactions  are  recorded,  five  of  which  we  have  analyzed 
below,  using  the  four  questions  given  above. 

Transaction  1.  On  January  3,  1922,  Frank  Brown  invests  $2,000.00 
cash  in  a  retail  business. 

1.  Cash  and  Proprietorship  accounts  are  affected. 

2.  Cash  is  increased  $2,000.00 
Proprietorship  is  increased  $2,000.00. 

3.  Cash  is  an  asset  and  therefore  is  debited  with  increases. 
Proprietorship  is  credited  with  increases. 

4.  Cash  Account  is  debited  with  $2,000.00,  and  Capital  Account  is  cred- 
ited with  $2,000.00. 

Check  up  to  see  whether  or  not  this  double  entry  has  been  made  in  the 
accounts  shown  in  Figure  5. 

Transaction  2.  On  January  5,  Brown  buys  office  furniture  for  $1,000.00 
cash.  In  working  out  the  four  steps  by  numbers,  this  analysis  would  fol- 
low: 

1.  Cash  and  Office  Furniture  accounts  are  involved. 

2.  Office  Furniture  is  increased,  and  Cash  is  decreased. 

3.  Since  both  accounts  are  assets,  they  are  always  increased  on  the  left 
side  and  decreased  on  the  right  side. 

Assignment  3,  Page  8 


4.  Office  Furniture  is  debited  with  $1,000.00  because  it  is  increased. 
Cash  is  credited  with  $1,000.00  because  it  is  decreased. 

Have  the  proper  debit  and  credit  in  the  two  accounts  been  shown? 

Transaction  3.    On  January  6  Brown  pays  $60.00  rent. 

1.  Cash  and  Expense  accounts  are  involved. 

2.  Cash  is  decreased,  and  Expense  is  increased. 

3.  Increases  are  shown  in  both  accounts  on  the  left  side,  and  decreases 
on  the  right  side. 

4.  Expense  is  debited  with  $60.00,  and  Cash  is  credited  with  $60.00. 
Do  you  find  this  debit  and  credit  in  the  ledger  accounts? 

Transaction  4.  On  January  10  Brown  buys  on  account  merchandise 
worth  $500.00  from  Witt  &  Kling.  We  have  omitted  the  analysis  for 
Transactions  4  and  5,  and  have  given  only  the  results. 

Debit  Purchases  with  $500.00,  and  credit  Accounts  Payable  with 
$500.00. 

Have  the  debit  and  credit  entries  been  made  in  the  accounts  ? 

Transaction  5.  On  January  12  Brown  borrows  $1,500.00  from  the  bank 
and  gives  the  bank  a  promissory  note. 

Debit  Cash  with  $1,500.00,  and  credit  Notes  Payable  with  $1,500.00. 

See  whether  these  entries  were  properly  made. 

Make  a  similar  analysis  of  the  remaining  transactions,  using  the  same 
four  steps. 

Important  Accounting  Principles.  By  making  this  careful  analysis  of 
five  transactions  of  Brown's  business  we  have  illustrated  several  impor- 
tant accounting  principles  that  apply  to  all  ledger  accounts.    They  are  as 

follows : 
• 

1.  Every  account  must  have  a  proper  heading,  which  indicates  clearly 
the  nature  of  the  entries  it  contains. 

2.  Every  transaction  must  be  recorded  on  the  same  line  with  the  date, 
sufficient  explanation  of  the  nature  of  the  transaction,  and  the 
amount. 

3.  Liability,  Capital,  Sales,  and  Other  Income  accounts  are  always  cred- 
ited for  increases  and  debited  for  decreases.  They  have  credit  bal- 
ances. 

4.  Asset,  Expense,  and  Purchase  accounts  are  always  debited  for  in- 
creases and  credited  for  decreases.    They  have  debit  balances. 

5.  The  total  amount  credited  is  equal  to  the  total  amount  debited. 

6.  Every  transaction  has  a  twofold  effect  on  the  accounts. 

Assignment  3,  Page  S 


THE  TRIAL  BALANCE 

The  keeping  of  accounts  is  based  upon  principles  of  exactness.  There 
are  hard  and  fast  rules  which  cannot  be  side-stepped,  and  safeguards  are 
provided  against  errors  which  make  it  possible  for  the  accountant  to  check 
his  work  to  assure  himself  that  he  has  not  violated  those  principles. 

There  is  no  accounting  operation  which  may  be  said  to  be  an  exception 
to  this  statement.  Let  us  take,  as  an  example,  the  fundamental  rule  that 
underlies  the  double  entry  system. 

Every  credit  entry  in  one  account  must  be  offset  by  a  similar  debit 
entry  in  another  account. 

The  safeguard  that  uncovers  violations  of  this  rule  is  known  as  a  trial 
balance.  It  is  a  trial  or  test  to  see  whether  the  total  debit  entries  in  the 
ledger  correspond  with  the  total  credit  entries.  If  they  agree,  the  ledger 
entries  are  accepted  as  correct. 

How  to  Make  a  Trial  Balance.  To  amplify  this  statement  and  show  the 
purpose  of  the  trial  balance  as  well  as  the  method  of  applying  it  to  actual 
business,  we  will  take  the  accounts  of  Frank  Brown,  as  listed  in  Figure  5, 
and  prepare  a  trial  balance.  In  doing  so,  we  must  organize  our  work  ac- 
cording to  the  following  plan : 

First,  make  a  list  of  the  accounts  as  they  appear  in  the  ledger. 

Then,  set  up  two  columns  to  the  right  of  this  list.  The  left-hand  col- 
umn is  for  debits  and  the  right-hand  column  is  for  credits. 

Finally,  after  each  account  named,  enter  in  the  columns  the  total  debits 
and  the  total  credits  for  each  account  as  you  find  them  in  the  ledger,  thus : 


TRIAL  BALANCE  (OF  TOTALS),  JANUARY  31,  1922 

Debit     Credit 


Cash $3  ,900.00  $1,180.00 

Office  Furniture 1,000.00 

Accounts  Receivable 1,100.00  400.00 

Notes  Payable 1 , 800.00 

Accounts  Payable 300.00  700.00 

Purchases 700.00 

Sales 1,100.00 

Expenses 180.00 

Capital 2 ,  000 .  00 

Total $7 ,  180 .  00  $7 ,  180 .  00 


The  Trial  Balance  (of  Totals) 

Figure  6.  Since  every  credit  entry  in  a  ledger  must  be  offset  by  a  similar  debit  entry, 
the  taking  of  a  trial  balance  is  largely  for  the  purpose  of  seeing  whether  or  not  this  pro- 
cedure has  been  followed  exactly.  This  is  a  trial  balance  of  totals.  As  stated  in  the 
discussion,  the  same  results  can  be  arrived  at  by  taking  a  trial  balance  of  balances,  as 

shown  in  Figure  7. 

Assignment  3,  Page  10 


Trial  Balance  of  Balances.  Let  us  take  the  same  list  of  accounts  as 
shown  in  Figure  6  and  instead  of  taking  the  total  debits  and  total  credits 
of  each  account,  let's  take  merely  the  balance.  In  other  words,  let's  find 
out  which  side  of  each  account  is  larger,  and  how  much  larger.  First  no- 
tice the  Cash  Account.  The  total  debits  amount  to  $3,900.00,  and  the  total 
credits  amount  to  $1,180.00.  The  difference  you  will  find  is  $2,720.00. 
This  we  call  the  balance  of  the  Cash  Account.  Since  the  debit  side  is 
$2,720.00  larger  than  the  credit  side,  we  say  the  Cash  Account  has  a  debit 
balance. 

Using  this  illustration  of  the  cash  balance,  you  will  have  no  trouble  in 
getting  the  balance  for  each  of  the  other  accounts.  The  trial  balance  of 
balances  appears  as  shown  in  Figure  7. 


TRIAL 
1  Cash 

BALANCE 

Frank  Brown 
(OF  BALANCES),  JANUARY 

31, 

1922 

Debit 

Credit 

$2,720.00 

$1,800.00 
400.00 

1,100.00 

2,000.00 

j  Office  Furniture  .   .  . 

1,000.00 

1  Accounts  Receivable 

700.00 

Notes  Payable 

Accounts  Payable 

*Purchases  

700.00 

j   Sales  .  .. 

Expenses 

180.00 

Capital 

•Merchandise  on  hand  J 

anuary 

31 

,  1922,  $100.00. 

$5,300.00 

$5,300.00 

The  Trial  Balance  (of  Balances) 

Figure  7.  Here  we  have  the  trial  balance  made  up  from  balances  rather  than  from 
totals.  So  far  as  proof  as  to  the  accuracy  of  the  accounts  is  concerned,  there  is  no  differ- 
ence between  this  type  of  trial  balance  and  one  made  up  from  totals.  The  trial  balances 
of  balances,  however,  possess  certain  advantages  which  you  will  find  fully  explained  in 

the  text. 

The  advantage  is  this:  The  trial  balance  is  the  intermediate  step  be- 
tween the  ledger  and  the  statements.  For  example,  the  accountant  does  not 
take  over  the  asset  and  liability  amounts  directly  from  the  ledger  into  the 
balance  sheet.  First  of  all  he  sets  up  a  trial  balance,  to  test  the  accuracy  of 
the  accounts.  Now,  while  the  accountant  tests  the  accounts  by  means  of 
a  trial  balance,  he  might  just  as  well  set  up  the  trial  balance  in  such  a  form 
that  he  can  transfer  the  amounts  directly  from  the  trial  balance  into  the 
statements  without  any  further  calculations.  Figure  8  shows  a  profit  and 
loss  statement  made  up  from  items  in  the  foregoing  trial  balance. 

You  will  notice  in  the  profit  and  loss  statement  shown  in  Figure  8,  that 
of  the  goods  purchased,  all  were  sold  except  $100.00  worth.  This  unsold 
merchandise  is  really  in  the  Purchases  Account  and  must,  therefore,  be 
subtracted  from  the  Purchases  amount  to  find  the  cost  of  goods  sold. 

Assignment  3,  Page  11 


Total  Sales 

Frank  Brown 

PROFIT  AND  LOSS  STATEMENT 

For  the  month  of  January,  1922 

$1,100.00 
600.00 

Purchases  During  January. 
Current  Inventory 

...S  700.00 
100.00 

Cost  of  Goods  Sold 

Gross  Profit 

$  500.00 
180.00 

Expenses 

Net  Profit 

$  320.00 

The  Profit  and  Loss  Statement 

Figure  8.    Brown's  accountant  would  use  the  trial  balance  of  balances  in  making  up  his 

monthly  balance  sheet  and  profit  and  loss  statement.     This  form  illustrates  how  the 

profit  and  loss  statement  will  appear. 

The  balance  sheet  made  up  from  the  same  trial  balance  is  shown  in 
Figure  9. 


Frank  Brown 

BALANCE  SHEET,  JANUARY  31,  1922 

ASSETS 

LIABILITIES  AND  CAPITAL 

Current  Assets 

Current  Liabilities 

Cash $2,720.00 

Accounts  Receivable.   700.00 
Mprchandiae           100  00 

Accounts  Payable. . .$   400.00 
Notes  Payable 1,800.00 

Total  Liabilities $2,200.00 

Total  Current  Assets $3,520.00 

Fixed  Assets 

Capital 

Office  Furniture 1,000.00 

Net  Worth,  Jan.  1..$  2,000.00 
Net  Profit  for  Jan.    320.00 

Present  Net  Worth $2,320.00 

$4,520.00 

$4,520.00 



The  Balance  Sheet 

Figure  9.    The  accountant  has  taken  the  balance  sheet  items  from  the  ti'ial  balance  of 

balances.    If  he  had  taken  them  from  the  trial  balance  of  totals,  he  would  have  had  to 

determine  the  balances  first  before  setting  up  the  balance  sheet. 

The  Main  Purposes  of  the  Trial  Balance.    It  is  apparent,  then,  that  the 
trial  balance  serves  two  important  purposes: 

First. — It  is  used  to  test  the  correctness  of  the  ledger. 


Assignment  3,  Page  12 


Second. — It  is  used  in  making  up  the  balance  sheet  and  the  profit  and 
loss  statement. 

Order  of  Entering  Ledger  Accounts.  You  no  doubt  have  noticed  that 
the  accounts  of  Frank  Brown  have  been  explained  in  the  order  in  which 
they  were  set  up  in  the  general  ledger — assets  first,  then  liabilities,  then 
nominal  accounts,  and  finally  the  capital  account.  While  there  is  no  rule 
for  entering  these  accounts  in  a  certain  order,  it  is  considered  the  best 
practice  to  arrange  them  in  the  order  in  which  they  appear  in  the  balance 
sheet  and  the  profit  and  loss  statement.  However,  if  some  other  plan  is 
better  adapted  to  the  needs  of  a  business,  that  is  the  one  to  use.  The  im- 
portant consideration  is  to  save  as  much  time  and  effort  as  possible. 

THE  IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

When  we  summarize  the  outstanding  principles  of  accounting  practice 
explained  in  this  assignment  we  find  it  desirable  to  reemphasize  the  fol- 
lowing: 

First — The  ledger  is  a  permanent  record  of  all  transactions  of  a  business. 
Not  only  must  the  entries  be  correct  but  they  must  be  properly 
classified. 

Second — There  are  two  kinds  of  ledger  accounts — Real  and  Nominal.  Real 
accounts  are  more  or  less  permanent  and  include  Assets,  Liabilities, 
and  Capital.  Nominal  accounts  are  accounts  such  as  Sales,  Pur- 
chases, Expenses,  and  Income  which  change  currently  thruout  the 
accounting  period. 

Third — Ledger  entries  are  made  according  to  the  debit  and  credit  method, 
known  as  the  double  entry  system,  which  is  based  on  the  rule  that 
every  debit  entry  must  be  offset  by  a  credit  entry. 

Fourth— The  trial  balance  is  the  test  by  which  an  accountant  can  detect 
errors  in  his  ledger  entries. 


ViiTobiems  on  next  page.) 


Assignment  3,  Page  IS 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  3 

Assignment  3  teaches  some  fundamental  principles  which  it  is  abso- 
lutely essential  that  you  understand  thoroly.  The  double  entry  principle 
explained  in  this  assignment  is  the  basic  principle  in  all  modern  account- 
ing practice. 

Apply  the  principles  learned  in  this  assignment  to  the  following  prac- 
tical problems.  If  you  succeed  in  "getting  a  balance"  in  problem  3,  you 
can  safely  feel  that  you  have  an  understanding  of  this  very  important 
asignment. 

Observe,  as  usual,  all  previous  instructions,  and  send  in  work  that  will 
pass  a  rigid  test  both  as  to  correctness  and  appearance. 

1.  The  following  accounts  appear  on  the  ledger  of  the  F.  L.  Lowe  Trad- 
ing Company.  Make  two  columns,  listing  in  the  one  those  accounts  that 
have  a  debit  balance,  and  in  the  other  those  accounts  that  usually  have  a 
credit  balance. 

Cash  Taxes 

Accounts  Receivable  DEPREaATioN  of  Buildings  (Expense) 

Notes  Payable  Buildings 

Accounts  Payable  Office  Furniture 

Merchandise  Inventory  Sales  Discounts 

Purchases  Purchase  Discounts 

Deuvery  Equipment  Purchase  Allowances 

Sales  Salesmen's  Commissions 

Delivery  Expense  Notes  Receivable 

Interest  Earned  Rent  Received 

Interest  Expense  Loss  on  Bad  Debts 

Capital  Mortgage  Payable 

Insurance  Expense  Sales  Allowances 

2.  Set  up  ledger  accounts  with  the  following  transactions  properly 
entered. 

Jan.    3,  1922,  P.  A.  Morgan  begins  a  wholesale  shoe  business  with  a  cash  investment  of 
$4,000.00. 

3,  Pays  $100.00  for  rent. 

4,  Buys  office  furniture  for  $120,00  cash. 

5,  Buys  $3,637.50  worth  of  shoes,  on  account,  from  W.  Eddy  &  Company. 

6,  Pays  $1,000.00  cash  to  the  Springfield  Shoe  Company  for  an  order  of  shoes. 

7,  Sells  shoes  to  W.  J.  Watson  on  account,  amounting  to  $350.75. 

10,  Buys  a  delivery  truck  for  $1,200.00  cash. 

11,  Sells  to  C.  A.  Brown,  shoes  on  account,  for  $600.00. 

12,  Returns  $50.00  worth  of  shoes  to  W.  Eddy  &  Company,  and  receives  credit  for 
$50.00. 

14,  Pays  $200.00  to  W.  Eddy  &  Company  to  apply  on  account. 

17,  Pays  $150.00  for  an  office  safe. 

18,  Sells  shoes  on  account  for  $750.00  to  Charles  Harrison. 

19,  W.  J.  Watson  complains  that  part  of  his  order  of  Jan.  7  was  of  inferior  grade. 
He  is  not  required  to  return  the  goods,  but  is  allowed  credit  for  $25.00. 

21,  Receives  a  check  from  C.  A.  Bro\vn  for  $300.00  to  apply  on  his  account,  and  a 

30-day  note  covering  the  balance  of  the  account. 
24,  Sells  shoes  worth  $510.00  to  R.  S.  Stone,  who  gives  a  note,  payable  in  30  days. 

Assignment  3,  Page  14 


25,  Borrows  $1,000.00  from  First  National  Bank  on  his  note,  payable  in  60  days. 

26,  Sells  $450.00  worth  of  shoes  on  account  to  F.  Jones. 
28,  Pays  $5.00  for  telephone  service  in  January. 

30,  Pays  $10.00  for  newspaper  advertising  in  January. 

31,  Pays  clerk's  salary  for  January,  $150.00. 

31,  Receives  $20.00  from  the  sale  of  old  boxes.     (This  income  should  be  recorded 
in  an  account  separate  from  regular  sales.) 

3.    (a)  From  the  ledger  accounts  which  you  have  set  up  in  Solution  2, 
prepare  a  trial  balance  of  balances. 

(b)  From  this  trial  balance  set  up  a  profit  and  loss  statement  for 
the  month.  The  Merchandise  Inventory  of  January  31,  1922, 
amounted  to  $2,500.00. 

(c)  Prepare  a  balance  sheet  showing  the  financial  condition  of  the 
business  as  of  January  31,  1922. 


You  can't  keep  your  work  up  to  date  ifjyou  don't  keep  your 
mind  up  to  date. 

— Herbert  Kaufman 


Assignment  8,  Page  18 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  fl/j/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  4 

CLOSING  THE  LEDGER 


THE  training  offered  by  an  institution  such  as  LaSalle 
Extension  University,  supplementing  as  it  does,  in  a 
most  valuable  way,  the  purely  mechanical  details  acquired 
in  the  office  or  bank,  should  be  of  great  practical  advan* 
tage  to  all  who  are  ambitious  to  prepare  themselves  for 
the  numerous  avenues  of  useful  and  profitable  employ* 
ment  which  the  future  will  surely  afford. 

ELMER  H.  YOUNGMAN, 

Editor,  Banker'*  Magcaint 


LaSalle  Extension  University 

Chicago 


NHA.4 
11-62 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review    • 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaS.\lle  Extension  University 


CLOSING  THE  LEDGER 

BRINGING  TOGETHER  THE  PROFIT  AND  LOSS  ACCOUNTS 

The  information  which  is  collected  and  classified  in  the  ledger  during 
an  accounting  period  usually  appears  in  a  large  number  of  accounts.  At 
the  end  of  the  period  the  accounts  containing  this  information  are  totaled, 
a  trial  balance  is  taken,  and  the  statements  are  then  prepared. 

Summary  of  the  Ledger  Necessary.  Besides  furnishing  information 
for  the  statements,  the  accounts  must  also  be  summarized  in  the  ledger 
itself.  In  other  words,  all  temporary  or  nominal  accounts,  such  as  Pur- 
chases, Sales,  and  Other  Income  and  Expense  accounts  must  be  summar- 
ized or  closed.  In  these  accounts  have  been  recorded  all  changes  in  net 
worth  during  the  period.  The  net  result  of  all  these  changes,  whether  a 
profit  or  loss  for  the  period,  must  finally  be  brought  into  the  Capital 
Account  if  the  Capital  Account  is  to  show  the  facts,  namely  the  present 
net  worth.  This  summarizing  of  the  nominal  accounts  is  a  process  of 
several  steps,  commonly  called  "closing  the  ledger." 

The  Closing  Process.  Closing  the  ledger  does  not  bring  any  new 
transactions  into  the  ledger;  it  does  not  change  in  any  way  the  assets, 
liabilities,  profits,  or  losses ;  it  merely  summarizes,  that  is,  brings  together, 
what  is  already  in  the  accounts.  In  other  words,  it  is  an  internal  adjust- 
ment of  the  ledger. 

The  closing  process  involves  several  definite  steps,  which  can  be 
described  best  by  means  of  a  practical  example  from  business.  We  have 
selected  John  Singer's  business  for  the  purpose  of  illustration. 

Illustration.  John  Singer  is  a  dealer  in  potatoes.  He  generally  buys 
his  potatoes  from  out-of-tov/n  commission  merchants  and  sells  them  to 
grocers  of  his  own  city. 

The  store  in  which  he  does  business  is  small  and  costs  him  only 
$50.00  a  month  rent.  In  fact  he  doesn't  need  a  large  store,  because  he 
never  keeps  a  large  stock  on  hand.  He  employs  two  men — one  a  handy 
man  around  the  store,  and  the  other  an  accountant. 

Mr.  Singer  devotes  most  of  his  time  to  buying  and  selling,  and  leaves 
the  work  of  keeping  records  to  his  accountant. 

Like  any  successful  business  man,  he  leaves  nothing  to  guesswork. 
Each  month  he  checks  up  with  his  accountant  so  that  he  will  know  exactly 
where  the  business  stands. 

Net  Profit  Determined  by  Statements.  On  the  last  day  of  September, 
1921,  the  accountant  took  a  trial  balance,  and  from  this  trial  balance  made 
a  profit  and  loss  statement  for  the  month.    The  net  profit  for  September, 


as  shown  on  his  statement,  amounted  to  $214,54.  The  accountant  also 
made  a  balance  sheet,  in  which  the  same  net  profit  was  shown  as  added 
to  the  capital  on  September  1,  1921. 

Why  the  Ledger  Must  Be  Closed.  Thus  at  the  end  of  the  month 
Singer  knew  his  net  profit  and  his  present  net  worth  from  the  information 
which  was  summarized  in  the  statements.  But  the  summary  in  the  state- 
ments did  not  in  any  way  change  the  ledger  accounts  themselves.  In  the 
profit  and  loss  statement,  for  example,  the  net  profit  for  the  month  was 
determined  by  summarizing  the  nominal  accounts  in  the  form  of  a  report. 
It  was  necessary  also  for  the  accountant  to  make  a  summarj'-  in  the  ledger 
in  order  to  bring  the  net  profit  figure  finally  into  the  Capital  Account.  In 
other  words  he  must  close  the  ledger. 

When  the  Ledger  Is  Closed.  It  is  customary  to  close  the  nominal 
accounts  at  regular  intervals,  usually  at  the  time  of  making  the  state- 
ments. As  explained  in  Assignment  3,  the  nominal  accounts  are  tempo- 
rary and  are  used  during  the  period  to  record  all  profits  and  losses.  At  the 
end  of  the  accounting  period  these  profit  and  loss  accounts  have  served 
their  purpose,  and  for  this  reason  they  are  balanced  and  ruled  off. 

It  was  necessary,  therefore,  for  Singer's  accountant  to  close  the  ledger 
on  September  30.    His  ledger  contained  the  accounts  given  in  Figure  1. 

LEDGER  ACCOUNTS  (John  Singer) 

REAL— BALANCE  SHEET  ACCOUNTS 

CASH 


DATE 

ITEMS 

Fol. 

v^ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 

Sept. 

1 

Balance  on  Hand 

2000 

00 

1921 

Sept. 

3 

Expense,  Rent 

50 

00 

13 

Franklin  &  Smith 

75 

00 

5 

Purchase 

450 

00 

23 

Franklin  &  Smith 

60 

00 

9 

Expense,  Stationery 

10 

00 

28 

Income,  Sale  of  Empty 

14 

Roach  &  Co. 

160 

00 

Barrels 

10 

00 

24 

Wells  Potato  Farm 

150 

00 

26 

Freight  on  Purchase 

47 

50 

30 

Delivery  Equipment 

340 

00 

30 

Expense,  Clerk's 

00 

— 

Salary 

115 



— 

30 

Expense,  Accountant's 

— 

Salary 

170 

00 

(Accounts  continued  on  next  page.) 


Assignment  4,  Page  2 


ACCOUNTS  RECEIVABLE 


DATE 

ITEMS 

Fol. 

y 

■DEBITS 

DATE 

ITEMS 

Fol. 

y 

CREDITS 

1921 
Sept. 

1 

Balance 

135 

00 

1921 
Sept. 

13 

Cash,  Franklin  & 

10 

Acme  Grocery  Co. 

330 

00 

Smith 

— 

75 

GO 

16 

Franklin  &  Smith 

415 

00 

22 

Note  from  Acme  Groc- 

27 

Acme  Grocery  Co. 

542 

24 

ery  Co. 

180 

00 

23 

Cash,  Franklin  &  Smith 

60 

00 

INVENTORY 


1921 

Aug. 

31 

Balance 

— 

112 

00 

1921 

- 



- 

DELIVERY  EQUIPMENT 

1921 

Sept. 

1 

Balance 

340 

00 

1921 



— 



— 

NOTES  RECEIVABLE 


ACCOUNTS  PAYABLE 


1921 

Sept. 

22 

Acme  Grocery  Co. 

180 

00 

1921 

— 

1921 

Sept. 

14 

Cash,  Roach  &  Co. 

160 

00 

1921 

Sept. 

1 

20 

Balance 

700 

00 
20 

17 

Note,  Roach  &  Co. 

200 

00 

Wells  Potato  Farm 

224 

24 

Cash,  Wells  Potato 

Farm 

150 

00 

00 

30 

Cash,  Horse  and  Wagon 

340 

30 

Note,  Wells  Potato 

Farm 

74 

20 

— 

NOTES  PAYABLE 


1921 

1921 
Sept. 

17 

Roach  &  Co. 

200 

00 

30 

Wells  Potato  Farm 

74 

20 

(Accounts  continued  on  next  page.) 


Assignment  4,  Page  8 


1921 


CAPITAL 

p921 
Sept. 


Balance 


1887 


00 


NOMINAL— PROFIT  AND   LOSS   STATEMENT   ACCOUNTS 

PURCHASES 


1921 
Sept. 

5 

Cash 

450 

00 

1921 

20 

Wells  Potato  Farm 

224 

20 

— 

26 

Cash,  Freight-In 

— 

47 

50 



SALES 


1921 

1921 

Sept. 

10 

Acme  Grocery  Co. 

330 

00 
00 
24 



— 

16 

27 

Franklin  &  Smith 

415 

Acme  Grocery  Co. 

542 

INCOME  (OTHER  THAN  SALES) 


1921 

1921 

Sept. 

28 

Cash,  Empty  Barrels 

10 

00 

EXPENSES 


1921 
Sept. 

3 

Cash,  Rent 

50 

00 
00 
00 

1921 

— 

9 

Cash,  Stationery 

10 

30 

Clerk's  Salary 

115 



30 

Accountant's  Salary 

170 

00 

Ledger  Accounts 

Figure  1.  Mr.  Singer's  ledger  accounts  shown  here  contain  only  specimen  transactions. 
The  balances  are  carried  forward  as  of  September  1.  The  accounts  are  grouped  in  two 
general  classes: 

1.  Real,  or  Balance  Sheet  Accounts 

2.  Nominal,  or  Profit  and  Loss  Statement  Accounts 

Assignment  4,  Page  4 


What  Is  Meant  by  Closing  an  Account?  Since  the  process  of  closing- 
the  ledger  involves  the  closing  of  certain  accounts,  it  is  necessary  first  of 
all  to  understand  what  is  meant  by  "closing  an  account." 

The  closing  of  an  account  as  illustrated  in  Figure  2  requires  three 
definite  steps: 

1.  Balancing  the  account 

2.  Double-ruling  the  account 

3.  Transferring  the  balance  to  another  account, 
which  is  usually  a  summary  account. 

PURCHASES 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

\/ 

CREDITS 

1921 
Sept. 

5 

Cash 

450 

00 

1921 

Sept. 

30 

Balance  to  Trading 

721 

70 

20 

Wells  Potato  Para 

224 

20 

— 

26 

Cash,  Freight-In 

47 

50 

— 

— 

721 

70 

721 

70 

TRADING 


1921 

Sept. 

30 

Balance  of  Purchases 



— 

721 

70 

1921 

— 

Closing  an  Account  Illustrated 

Figure  2.  Follow  Mr.  Singer's  accountant  step  by  step,  and  you  will  know  exactly  how 
to  close  an  account.  The  first  thing  to  do  is  to  balance  the  account;  in  this  case  credit 
the  Purchases  Account  with  an  amount  large  enough  to  balance  the  debit  side,  $721.70. 
Then  total  both  sides  of  the  account  and  double  rule  it.  The  third  step  is  to  debit  the 
Trading  Account  with  the  same  amount  that  was  credited  to  the  Purchases  Account. 

Accounts  to  Be  Closed.  Closing  the  ledger  does  not  mean  that  all 
accounts  in  the  ledger  are  closed.  Only  those  accounts  are  closed  that  are 
summarized  in  the  profit  and  loss  statement,  namely  those  which  involve 
changes  in  net  worth.    They  are: 

Sales 

Purchases 
Prea'ious  Inventory 
Expenses 
Income 

The  balance  sheet  accounts  are  not  closed,  because  they  do  not  record 
changes  in  net  worth.    They  are: 


Cash 

Accounts  Receivable 
Current  Inventory 

(Set  up  as  a  new  account) 


Delivery  Equipment 
Notes  Receiv.'^ble 
Accounts  Payable 
Notes  Payable 


Assignment  4,  Pago  5 


Balance  sheet  accounts  are  not  formally  closed  as  are  the  nominal 
accounts,  but  they  may  be  ruled  and  balanced  when  they  are  forwarded  to 
the  next  page.  They  cannot  be  said  to  be  closed,  because  their  balance  is 
not  transferred  to  a  summary  account. 

Summary  Accounts  Used  in  Closing.  When  Singer's  accountant  closed 
his  ledger,  he  set  up  two  new  accounts,  the  "Trading  Account"  and  the 
"Profit  and  Loss  Account."  These  accounts  serve  as  partial  summaries  in 
the  closing  process.  They  do  not  appear  on  the  ledger  as  regular  accounts, 
but  are  provided  at  the  time  of  closing  to  receive  the  balances  of  the  ac- 
counts that  are  closed.  After  the  balances  have  been  entered,  they  in  turn 
are  also  closed,  and  do  not  reappear  until  the  next  closing  date.  The  bal- 
ance of  the  Trading  Account  is  either  gross  profit  or  gross  loss.  The 
balance  of  the  Profit  and  Loss  Account  is  either  net  profit  or  net  loss. 

In  closing  the  nominal  accounts,  the  accountant  did  the  following  three 
things : 

I.  Brought  together  SALES,  PURCHASES,  AND  INVENTORIES  into  the  Trading 
Account  to  DETERMINE  GROSS  PROFIT. 

II.  Carried  gross  profit  TO  THE  PROFIT  AND  LOSS  ACCOUNT,  thus  closing  the 
Trading  Account,  and  then  offset  this  gross  profit  with  the  balance  of  the 
Expense  Account  and  added  the  balance  of  the  Income  Account  to  determine  the 
net  profit. 

III.  Closed  the  PROFIT  AND  LOSS  ACCOUNT  and  carried  the  NET  PROFIT  TO  THE 
CAPITAL  ACCOUNT  AS  A  CREDIT. 

Each  of  these  three  steps  ^vill  now  be  fully  illustrated. 


I.     PURCHASES,    SALES,    INVENTORY    CLOSED    INTO    TRADING 

ACCOUNT 

Figure  3  shows  these  accounts  as  they  appeared  after  the  accountant 
closed  them  into  the  Trading  Account  to  determine  the  gross  profit. 


*7.T'^-^'-° 

■'■. 

SALES 

DATE 

ITEMS 

Fol. 

v' 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 
Sept. 

30 

Balance  to  Trading 

1921 
Sept. 

10 

Acme  Grocery  Co. 

330 

00 

Account 

1287 

24 

16 

Franklin  &  Smith 

415 

00 

— 

1287 

24 

27 

Acme  Grocery  Co. 

542 

24 

1287 

24 

{Accounls  conlinued  on  next  page.) 


Assignment  4,  Page  6 


PURCHASES 


DATE 

ITEMS 

Fol. 

\/ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 
Sept 

5 

Cash 

450 

00 
20 

1921 

Sept. 

30 

Balance  to  Trading 

20 

Wells  Potato  Farm 

224 

Account 

721 

70 

26 

Cash,  Freight 

47 

50 
70 

721 

— 

721 

70 

INVENTORY 


1921 

Aug. 

31 

Goods  on  Hand 

112 

00 

1921 
Sept. 

30 

Balance  to  Trading 

Account 

112 

00 

Sept. 

30 

Goods  on  Hand 

96 

00 

TRADING 


1921 
Sept. 

30 

Previous  Inventory 



— 

112 

00 

1921 

Sept. 

30 

Current  Inventory 

— 

96 
1287 

00 
24 

30 

Purchases 

721 

70 

30 

Sales 

Balance,  Gross  Profit 

549 

54 



— 

1383 

24 

1383 

24 

Closing  Accounts  into  Trading 

Figure  3.  Observe  how  each  of  these  accounts  is  closed  into  the  summary  account, 
Trading.  The  Sales  Account  has  a  credit  balance  of  $1,287.24.  To  close  it  the  account- 
ant must  debit  Sales  Account  with  this  amount,  and  credit  Trading  Account.  Purchases 
Account  is  closed  by  crediting  it  with  $721.70  and  debiting  Trading  with  the  same 

amount. 

Fix  in. your  mind  just  what  these  two  entries  into  the  Trading  Account 
mean.  The  balance  of  the  Sales  Account  is  credited,  and  the  balance  of 
the  Purchases  Account  is  debited,  to  the  Trading  Account.  If  Singer  had 
sold  all  the  goods  he  purchased  and  had  no  potatoes  on  hand  September 
30,  then  the  difference  between  the  sales  and  purchases  would  be  the  gi'oss 
profit.  But  this  is  not  the  case.  He  had  $96.00  worth  on  hand  September 
30,  and  the  Inventory  Account  shows  a  debit  of  $112.00. 

Inventory  Adjustments.  The  accountant,  therefore,  must  adjust  these 
two  inventories  to  show  the  facts  properly  on  the  books. 

Previous  Inventory.  As  you  note  in  the  accounts  above,  he  credits  the 
Inventory  Account  with  the  Previous  Inventory,  $112.00,  and  debits  the 
Trading  Account  for  the  same  amount,  thus  closing  the  Inventory  Account. 


Assignment  4,  Page  7 


Current  Inventory.  The  Current  Inventory  must  also  be  set  up  below 
the  double  ruling.  You  will  notice  that  the  accountant  debits  the  Current 
Inventory,  $96.00,  to  the  Inventory  Account  and  credits  the  Trading 
Account  with  the  same  amount. 

Gross  Profit — the  Balance  of  the  Trading  Account.  The  Trading 
Account  has  now  been  debited  with  Purchases  and  Previous  Inventory, 
and  credited  with  Sales  and  Current  Inventory.  This  account  now  shows 
(on  the  left)  all  goods  which  are  to  be  accounted  for,  both  the  goods  on 
hand  at  the  beginning  of  the  period  and  the  purchases.  It  shows  (on  the 
right)  the  goods  accounted  for— the  sales  and  the  goods  on  hand  at  the 
end  of  the  period.  The  difference  between  the  goods  to  be  accounted  for 
and  those  accounted  for  is  the  profit  due  to  Trading,  i.e..  Gross  Profit. 

TRADING  ACCOUNT 


DEBITS 

Previous  Inventory 

Balance  of  Purchases  Account 

Resulting  Balance  Is  Gross  Profit 


CREDITS 

Current  Inventory 
Balance  of  Sales  Account 


The  credit  side  is  larger  when  there  is  a  profit  on  trading,  and  the 
debit  side  is  larger  when  there  is  a  loss  on  trading. 

II.    PROFIT  AND  LOSS  ACCOUNT— FINAL  CLEARING  HOUSE  FOR 
ALL  NOMINAL  ACCOUNTS 

In  taking  the  second  step  in  closing  the  nominal  accounts,  the  account- 
ant sets  up  another  summary  account,  called  the  Profit  and  Loss  Account, 
into  which  he  carries  the  balance  of  the  Trading  Account,  at  the  same  time 
closing  the  Expense  and  Income  accounts.  Note  how  the  nominal  accounts 
are  closed  into  the  Profit  and  Loss  Account  in  Figure  4. 


EXPENSE 


DATE 

ITEMS 

Fol. 

v/ 

DEBITS 

DATE 

ITEMS 

Fol. 

y/ 

CREDITS 

1921 

Sept. 

3 

Cash,  Rent 

50 

00 

1921 

Sept. 

30 

Balance  to  Profit  and 

9 

Cash,  Stationery 

10 

00 

Loss 

345 

00 

30 

Cash,  Clerk's  Salary 

115 

00 

30 

Cash ,  Accountant's 
Salary 

170 

00 

345 

00 

345 

00 

{Accounts  continued  on  next  page.) 


Assignment  4,  Page  8 


INCOME 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 

Sept. 

30 

Balance  to  Profit  and 

— 

10 

00 

1921 
Sept. 

28 

Cash,  Empty  Barrels 

Loss 

10 

00 

TRADING 


1921 
Sept. 

30 

Balance  of  Purchases 

721 

70 

1921 

Sept. 

30 

Balance  of  Sales 

1287 

24 

30 

Previous  Inventory 

112 

00 
54 

30 

Current  Inventory 

96 

00 

30 

Gross  Profit  Carried 

to  Profit  aad  Loss 

549 

— 

1383 

24 

1383 

24 

PROFIT  AND  LOSS 


1921 

Sept. 

30 

Balance  of  Expenses 

345 

00 

1921 
Sept. 

30 

Balance  of  Income 

10 

00 

30 

Balance,  Net  Profit 

214 

54 

30 

Gross  Profit  from 

Trading 

549 

54 

Closing  Accounts  into  Profit  and  Loss 

Figure  4.  Mr.  Singer's  accountant  now  closes  all  three  accounts,  Expense,  Income,  and 
Trading,  into  one  summary  account,  called  Profit  and  Loss.  Notice  that  the  Trading 
Account  is  closed  into  this  Profit  and  Loss  Account,  by  debiting  the  Trading  Account 
virith  the  Gross  Profit  amount,  and  crediting  Profit  and  Loss  Account  with  the  same 
amount.     Follow  the  explanation  in  the  text  and  you  will  see  how  the  Expense  and 

Income  Accounts  are  closed. 

Expense  Closed  to  Profit  and  Loss.  Since  Gross  Profit  now  stands  in 
the  Profit  and  Loss  Account  as  a  credit,  and  Expenses  reduce  this  profit, 
the  accountant  will  debit  the  Profit  and  Loss  Account  mth  the  balance  of 
the  Expense  Account,  at  the  same  time  crediting  the  Expense  Account,  and 
thus  closing  it.  If  the  accountant  had  several  Expense  Accounts,  each 
account  would  be  closed  in  the  same  way  into  the  Profit  and  Loss  Account. 

Income  Closed  to  Profit  and  Loss.  Since  income  increases  the  profit, 
the  balance  of  the  Income  Account  is  credited  to  the  Profit  and  Loss  Ac- 
count. At  the  same  time  the  Income  Account  is  debited,  and  the  account 
is  closed  and  ruled. 


Assignment  4,  Page  9 


III.    TRANSFER  OF  THE  NET  PROFIT  TO  CAPITAL 

The  Profit  and  Loss  Account  now  has  two  credit  items  and  one  debit 
item.  The  balance  is  the  net  profit,  which  is  carried  to  the  Capital  Ac- 
count.   This  is  the  final  step  in  closing  the  ledger. 


PROFIT  AND  LOSS 


DEBITS 

Balances  of  Expense  Accounts 
Resulting  Balance,  Net  Profit  Carried 
to  the  Capital  Account 


CREDITS 

Balance  of  Trading  Account 
Balance  of  Income  Account 


The  accountant  now  closes  the  Profit  and  Loss  Account  into  the  Cap- 
ital Account.  In  doing  this  he  debits  the  Profit  and  Loss  Account  with  the 
balance  of  that  account,  which  is  the  net  profit,  and  credits  the  Capital 
Account  with  the  same  amount.    This  difference  amounts  to  $214.54. 


PROFIT  AND  LOSS 


DATE 

ITEMS 

Fol. 

v' 

DEBITS 

DATE 

ITEMS 

Fol. 

yl 

CREDITS 

1921 

Sept. 

30 

Balance  of  Expense 

1921 

Sept. 

30 

Balance  of  Income 

Account 

345 

00 

Account 

10 

00 

30 

Net  Profit  Carried  to 

30 

Gross  Profit 

549 

54 

Capital  Account 

214 

54 

559 

54 

559 

54 

CAPITAL 


1921 

Sept. 

30 

Balance  Down 

2101 

54 

1921 

Sept. 

1 

Capital 

1887 

00 

30 

Net  Profit,  September 

214 

54 
54 

2101 

54 

2101 

— 

— 



Oct. 

1 

Capital 

2101 

54 

Final  Closing  of  Profit  and  Loss  into  Capital 

Figure  5.  Mr.  Singer's  accountant  now  takes  the  last  step  in  the  closing  process,  by 
closing  the  Profit  and  Loss  Account  into  the  Capital  Account.  Thus  the  net  profit  is 
added  to  the  original  capital,  showing  that  Mr.  Singer  has  a  net  worth  of  $2,101.54. 
Then  the  Capital  Account  may  be  closed  by  a  debit  of  $2,101.54,  and  opened  again  under 
date  of  October  1,  with  a  credit  of  the  same  amount. 


Assignment  4,  Page  10 


TRIAL  BALANCE  (AFTER  CLOSING),  SEPTEMBER  30,  1921 

Debits 

Cash $  652.50 

Accounts  Receivable 1,107.24 

Inventory 96.00 

Delivery  Eijuipment 340.00 

Notes  Receivable 180.00 

Notes  Payable 

Capital 

$2,375.74 


Credits 


B     274.20 
2,101.54 

2,375.74 


The  Trial  Balance  (After  Closing) 

Figure  6.  The  trial  balance,  shown  here,  assures  the  accountant  that  he  has  made  no 
error  in  closing  the  ledger.  This  is  only  one  of  the  many  ways  in  which  the  accountant 
can  check  up  on  his  work  to  satisfy  himself  that  his  work  is  correct  up  to  date.  Notice 
that  the  trial  balance  after  closing  contains  exactly  the  same  items  as  those  that  would 
appear  in  the  balance  sheet.     The  only  difference   is  in  the   arrangement   of  items. 


TRIAL  BALANCE,   SEPTEMBER  30,   1921 


Debits 

Cash $     652.50 

Accounts  Receivable 1,107.24 

Inventory 112.00 

Delivery  Equipment 340.00 

Notes  Receivable 180.00 

♦Purchases 721.70 

Expense  Account 345.00 

Income  Account 

Sales 

Notes  Payable 

Capital 


Closing 

After 

Closing 

Credits 

Debits 

$  652.50 

1,107.24 

96.00 

340.00 

180.00 

Credits 

10.00 

$1,287.24 

274.20 

$  274.20 

1,887.00 

2,101.54 

$3,458.44 

$2,375.74 

$2,375.74 

*0f  this  amount,  $96.00  remains  unsold. 


Two  Trial  Balances  Compared 

Figure  7.  Here  you  have  the  two  trial  balances  side  by  side.  You  can  see  at  a  glance 
that  the  second  is  shorter  than  the  first,  because  Purchases,  Expense,  Income,  and  Sales 
accounts  are  omitted  in  the  second.  These  accounts  are  omitted  because  they  have 
been  closed  and  their  balances  have  been  summarized  or  reduced  to  net  profit,  which 
has  been  added  to  Capital.  Two  accounts,  Capital  and  Inventory,  have  different 
amounts  in  the  trial  balance  after  closing  from  what  they  had  in  the  trial  balance 
before  closing.  The  Capital  Account  is  larger  by  the  amount  of  net  profit.  The 
Inventory  Account  now  shows  the  Current  Inventory  amount  because  of  the  adjustment 

made  in  the  closing  process. 

Capital  Account  Closed.  It  is  customary  to  close  the  Capital  Account 
by  a  balance,  as  indicated  above.  This  consists  of  balancing  the  account 
by  a  debit  entry  on  the  date  of  closing  the  ledger  and  ruling  up  the  account. 
This  balance  is  then  brought  down  under  date  of  the  first  of  the  following 
month. 


Assignment  4,  Page  11 


Purpose  of  the  Trial  Balance  after  Closing.  The  accountant  has  now 
finished  the  closing  process.  He  has  been  making  numerous  debits  and 
credits.  To  safeguard  himself  against  errors  in  the  closing  process,  he 
verifies  his  ledger  by  taking  a  trial  balance.  He  lists  the  balances  of  all 
the  accounts  that  remain  open,  namely  the  real  accounts.  If  the  debits  and 
credits  have  been  made  correctly,  the  balance  will  be  as  shown  in  Figure  6. 

Difference  between  the  Two  Trial  Balances.  Compare  the  two  trial 
balances  of  John  Singer's  business,  and  note  what  items  are  omitted  or 
changed  in  the  trial  balance  after  closing. 

OTHER  METHODS  OF  CLOSING  THE  NOMINAL  ACCOUNTS 

Some  accountants  prefer  to  use  other  methods  in  closing  the  nominal 
accounts.    The  more  important  ones  are  as  follows: 

1.  Adjusting  the  inventory  thru  the  Purchases  Account  instead  of  thru  the  Trading. 

2.  Using  the  Sales  Account  as  a  Trading  Account. 

3.  Adjusting  the  inventory  and  closing  the  nominal  accounts  directly  into  the  Profit 
and  Loss  Account. 

1.  Adjusting  Inventories  thru  Purchases  Account.  The  accountant 
adjusted  the  inventories  thru  the  Trading  Account.  Some  accountants 
make  this  adjustment  thru  the  Purchases  Account  instead.  They  debit 
Purchases  Account  with  the  Previous  Inventory  and  credit  it  with  the 

PURCHASES 


DATE 

ITEMS 

Pol. 

y/ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 

Sept. 

5 

Cash 

450 

00 

1921 

Sept. 

30 

Current  Inventory 

96 

00 

20 

Wells  Potato  Farm 

224 

20 

30 

Cost  of  Goods  Sold, 

26 

Cash,  Freight 

47 

50 

to  Trading 

737 

70 

30 

Previous  Inventory 

112 

00 

833 

70 

833 

70 

TRADING 


1921 

Sept. 

30 

Cost  of  Goods  Sold 

737 

70 

1921 
Sept. 

30 

Sales 

1287 

24 

30 

Gross  Profit  to 

Profit  and  Loss 

549 

54 

-- 

— - 

1287 

24 



— 

1287 

24 

This 


Adjusting  Inventories  thru  Purchases  Account 
Figure  8.     Showing  another  way  of  adjusting  inventories.     As  you  see,  inventories 
are  not  brought  into  the  Trading  Account,  but  rather  into  the  Purchases  Account. 

method  is  quite  commonly  used. 

Assignment  4,  Page  12 


Current  Inventory.  After  making  these  entries,  they  carry  the  balance 
of  the  Purchases  Account,  which  is  the  cost  of  goods  sold,  into  the  Trading 
Account.  If  Singer's  accountant  had  used  this  method,  his  Purchases  and 
Trading  accounts  would  appear  as  in  Figure  8. 

2.  Sales  Account  Used  as  a  Trading  Account.  By  this  method  no 
Trading  Account  is  set  up,  all  trading  items  being  summarized  in  the  Sales 
Account.  Inventories  are  adjusted  thru  the  Purchases  Account,  and  the 
cost  of  goods  sold  is  carried  over  into  the  Sales  Account,  instead  of  into  the 
Trading  Account,  in  this  way : 


PURCHASES 

DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDI 

TS 

1821 
Sept. 

5 

Cash 

450 

00 
20 
50 

1921 

Sept. 

30 

Current  Inventory 



— 

95 

00 

20 

Wells  Potato  Farm 

— 

— 

224 
47 



30 

Cost  of  Goods  Sold, 

26 

Cash,  Freight 

to  Sales  Account 

- 

737 

70 

30 

Previous  Inventory 

112 

00 



- 

833 

70 

833 

70 

1 

SALES 


1921 

Sept. 

30 

Cost  of  Goods  Sold 



— 

737 
549 

70 
54 

1921 

Sept. 

10 
16 
27 

Acme  Grocery  Co. 

330 

00 

30 

Balance  Gross  Profit 



Franklin  &  Smith 

415 

00 

to  Profit  and  Loss 

Acme  Grocery  Co. 

542 

24 



— 



1287 

24 

1287 

24 

Sales  Used  as  Trading  Account 

Figure  9.  In  using  this  method  no  Trading  Account  is  needed.  Inventories  are  brought 
into  the  Purchases  Account,  and  then  the  balance  of  the  Purchases  Account  is  carried 
into  the  Sales  Account.  This  method  is  not  so  commonly  used,  but  you  may  run  across 
it  in  your  accounting  experience,  and  for  this  reason  you  ought  to  be  familiar  with  it 

3.  Inventories  Adjusted,  Nominal  Accounts  Closed  Directly  into 
Profit  and  Loss  Account.  By  this  method  no  intermediate  summary  is 
made  for  gi-oss  profit.  Inventories  are  adjusted  directly  into  the  Profit  and 
Loss  Account.  The  balances  of  Purchases,  Sales,  Expense,  and  Income  ac- 
counts are  also  carried  directly  into  the  Profit  and  Loss  Account,  as  shown 
in  Figure  10. 


Assignment  4,  Page  13 


PROFIT  AND  LOSS 


1921 

Sept. 

30 
30 
30 

Previous  Inventory 
Purchases 

— 

112 

721 
345 

00 

70 
00 

1921 

Sept 

30 
30 

Sales 

1287 



10 
96 

24 
00 
00 

Income 

Expenses 

30 

Current  Inventory 

30 

Net  Profit  to  Capital 

214 

54 



— 

1393 

24 



— 

1393 

24 

Direct  Entries  in  Profit  and  Loss  Account 

Figure  10,    Showing  a  method  that  has  been  approved  by  some  accountants.     It  has 
one   advantage   at   least — it   saves  time   by   eliminating   the   Trading   Account   as   an 

intermediate  step. 

The  ultimate  result  obtained  from  these  three  methods  is  exactly  the 
same  as  the  result  derived  from  the  method  first  shown.  The  method  used 
by  Singer's  accountant,  however,  is  generally  approved  by  the  best  author- 
ities on  accounting.  By  closing  Purchases  and  Sales  into  Trading  without 
first  adjusting  inventories  thru  the  Purchases  Account,  we  have  kept  the 
nominal  accounts,  pure  accounts,  that  is,  they  contain  nothing  but  profit 
and  loss  elements.  The  Current  Inventory  which  is  a  balance  sheet  item,  or 
real  account,  is  not  brought  into  Purchases  as  in  IMethod  1.  This  is  in 
accord  with  a  fundamental  accounting  principle  that  a  ledger  account 
should  not  contain  unlike  elements.  Purchases  Account  should  show  noth- 
ing but  purchases.  Sales  Account  nothing  but  sales,  and  all  the  other 
nominal  accounts  should,  in  like  manner,  contain  only  transactions  that 
affect  net  worth.  If  these  transactions  are  kept  in  their  respective  classes 
of  accounts,  they  can  be  quickly  referred  to  for  statistical  purposes. 

The  Old  Merchandise  Account.  Formerly  the  mixed  account  was  more 
in  favor  than  now.  For  example,  it  was  customary  to  carry  a  "Merchan- 
dise" Account,  to  which  were  debited  the  previous  inventory  and  all  pur- 
chases for  the  period,  and  to  which  were  credited  all  sales.  Then  at  the 
end  of  the  period,  the  current  inventory  was  credited.  Modern  account- 
ing practice  has  done  away  with  the  mixed  account  almost  entirely.  Sepa- 
rate accounts  are  now  used  for  purchases,  sales,  purchases  returned,  sales 
returned,  and  inventories. 

Statistical  Value  of  Nominal  Accounts.  By  keeping  a  separate  account 
for  purchases,  another  for  sales,  etc.,  the  accountant  is  able  to  collect  in- 
formation quickly.  He  wastes  no  time.  If  he  has  only  a  few  expenses  to 
record,  he  will  have  one  Expense  Account,  but  when  there  are  many 
expense  items,  he  will  classify  them  into  as  many  accounts  as  the  nature 
of  the  business  may  require.  John  Singer  has  only  one  Expense  Account. 
Large  concerns  provide  for  several  expense  accounts,  for  example,  Selling 
Expense,  Administration  Expense,  and  General  Expense.  Separate  ac- 
counts may  be  set  up  for  rent,  taxes,  insurance,  or  anything  on  M^hich 
information  may  be  desired  later. 


Assignment  4,  Page  14 


The  realpurpose  of  the  nominal  accounts,  then,  is  to  provide  tempo- 
rary places  in  which  transactions  of  profit  and  loss  may  be  analyzed.  At 
the  end  of  the  accounting  period  these  accounts  are  summarized  and  closed 
into  Capital,  in  the  form  of  net  profit.  They  may  therefore  be  thought  of 
as  temporary  expansions  of  the  Capital  Account. 

Why  All  Changes  in  Net  Worth  Are  not  Entered  Directly  into  the 
Capital  Account.  The  same  result  would  be  effected  if  the  nominal  ac- 
counts were  not  used.  For  example,  it  would  be  possible  for  the  account- 
ant to  record  purchases  and  expenses,  item  by  item,  as  debits  directly  in 
the  Capital  Account,  and  sales  and  income  as  credit  items  in  the  Capital 
Account.  Then  he  would  not  need  to  close  any  accounts  at  the  end  of  the 
period.  He  would  merely  adjust  the  inventories  into  the  Capital  Account. 
Then  the  balance  of  the  Capital  Account  would  be  carried  forward  as  the 
capital  for  October  1,  1921.  If  he  made  these  entries  directly  to  Capital, 
the  account  would  appear  as  in  Figure  11. 

CAPITAL 


DATE 

ITEMS 

Fol. 

v/ 

DEBITS 

DATE 

ITEMS 

Fol. 

v/ 

CREDITS 

1921 

Sept. 

1 

Potatoes  on  Hand 



— 

112 

50 

450 

00 
00 
00 

1921 

Sept. 

1 
10 
16 

Capital 

1887 

00 



3 

5 

Expense,  Rent 

Sale 

330 
415 
542 

00 
00 
24 

Purchase 

Sale 

— 

9 

Expense,  Stationery 

10 

00 

27 

Sale 

20 

Purchase 

224 

20 
50 
00 



28 

Income,  Sale  of 

26 

Freight  on  Purchase 

— 

47 
115 

Empty  Barrels 

10 

00 

30 

Expense,  Salary 

30 

Potatoes  on  Hand 

96 

00 

30 

Expense,  Salary 

170 

00 



30 

Balance 

2101 

54 

3280 

24 

3280 

24 

Oct. 

1 

Capital 

2101 

54 

Direct  Entries  in  the  Capital  Account 

Figure  11.  This  method  of  direct  entry  is  not  used  in  business,  because  the  Capital 
Account  would  thus  become  too  long  and  cumbersome,  especially  in  the  case  of  large 
concerns,  where  many  purchases  and  sales  are  made  and  hundreds  of  expenses  incurred. 
We  have  shown  you  how  these  direct  entries  might  be  made  so  that  you  will  under- 
stand fully  what  we  mean  by  saying  that  the  nominal  accounts  are  temporary  expan- 
sions of  Proprietorship  or  Capital.  Notice  that  the  balance  is  the  same  as  in  the  pre- 
ceding capital  accounts  shown  in  this  Assignment. 

You  can  see  how  difficult  it  would  be  to  collect  information  from  such 
a  Capital  Account  as  that  given  in  Figure  11,  especially  in  a  large  business. 


Assignment  4,  Page  15 


If  the  proprietor  wished  to  know  what  the  total  purchases  for  the  period 
were,  he  or  his  accountant  would  have  to  search  thru  a  long  list  of  trans- 
actions before  he  could  determine  the  amount.  Thus  you  can  see  the 
advantage  of  having  classified  nominal  accounts  for  reference  and  informa- 
tion purposes. 

How  to  Value  Inventory  of  Merchandise.  The  rule  followed  by  most 
accountants  and  business  men  is  to  value  the  inventory  at  cost  or  market 
price,  whichever  is  the  lower.  This  is  considered  the  most  conservative 
method  by  business  men.  The  federal  government  has  approved  its  use 
in  making  up  income  tax  returns. 

Singer  has  100  bushels  of  potatoes  on  hand,  Sept.  30,  1921,  and  he 
values  them  at  the  market  price,  96  cents  a  bushel,  because  it  is  lower  than 
the  average  cost  price.  If  the  present  market  price  were  higher  than  the 
cost  price,  then  the  cost  price  should  be  taken.  Suppose  that  potatoes 
have  gone  up  to  $1.10  a  bushel  on  Sept.  30,  1921,  and  suppose  that  Singer 
figures  his  inventory  at  $1.10  a  bushel.  This  would  increase  his  Current 
Inventory  amount  and  at  the  same  time  decrease  the  Cost  of  Goods  Sold 
amount,  with  the  result  that  his  Gross  Profit  would  be  larger.  Singer 
might  object  because  his  income  tax  would  thus  be  increased,  but  the  chief 
objection  from  the  accountant's  standpoint  is  that  Singer  would  be  antici- 
pating profits;  he  would  be  figuring  a  profit  not  yet  realized,  and  this  is 
contrary  to  good  accounting  principles. 

THE  ESSENTIAL  POINTS  OF  THIS  ASSIGNMENT 

When  you  have  read  this  fourth  assignment  carefully  you  will  know 
how  to  close  the  ledger. 

Briefly  stated  there  are  three  steps: 

1.  Sales,  Purchases  and  Inventory  are  closed — that  is 
summarized  in  the  Trading  Account. 

2.  Trading,  Expense  and  Income  Accounts  are  closed 
in  the  Profit  and  Loss  Account. 

3.  The   Profit   and   Loss  Account   is   closed   into   the 
Capital  Account. 

You  also  have  learned  three  other  v/ays  of  closing  a  ledger. 

In  the  second  place,  you  have  been  given  not  only  the  "how"  but  also 
the  "why"  of  closing  a  ledger. 

The  ledger  is  closed  periodically,  so  that  the  net  result  of  all  changes 
in  net  worth,  will  finally  be  reflected  in  the  Capital  Account.  Thus  at  the 
end  of  every  month,  or  oftener  if  desirable,  losses  and  gains  for  the  period 
may  be  summarized,  and  the  net  loss  or  net  gain  brought  into  the  Capital 
Account. 

The  old  nominal  accounts  disappear — they  are  closed  and  ruled,  and 
new  nominal  accounts  will  be  set  up  for  the  next  period. 

Assignment  4,  Page  16 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  4 

Observe  all  previous  instructions,  and  do  the  following  work  as  care- 
fully as  possible. 

It  will  be  necessary  for  you  to  transfer  the  following  accounts  of  Wil- 
liam Green  to  paper  of  your  own.  In  closing  the  balance  of  one  account 
into  another,  indicate  in  each  case  from  where  and  to  where  the  transfer 
is  made — just  as  we  have  done  in  the  examples  given  in  this  assignment. 

Problem  2  will  test  in  a  simple  way  your  ability  to  analyze.  It  is  im- 
portant to  an  accountant  to  possess  and  develop  this  ability. 

1.  At  the  close  of  business  December  31,  1921,  the  following  totals 
appeared  in  the  accounts  on  the  books  of  William  Green.  The  amounts 
shown  are  the  results  of  business  operations  from  July  1  to  December 
31,  1921. 

(a)  Prepare  a  trial  balance  (of  balances)  before  closing  the  nominal 
accounts. 

(b)  Close  the  nominal  accounts,  using  the  Trading  and  Profit  and  Loss 
accounts  as  explained  on  pages  8  and  9  of  this  assignment.  Show 
all  the  nominal  accounts  as  they  will  appear  after  closing. 

(c)  Make  a  trial  balance  after  closing. 
The  current  inventory  is  $1,900.00. 

CAPITAL  (William  Green) 


DATE 

ITEMS 

Fol. 

v/ 

DEBITS 

DATE 

r92r 

Dec. 

ITEMS 

Pol. 

v' 

CREDITS 

1921 

— 

- 

31 

4700 

00 

CASH 


1921 

Dec. 

31 

7000 

1921 
00  Dec. 

31 



— 

4670 

00 

PURCHASES 


1921 

Dec. 

31 





— 

3413 

1921 
62 

— 

_ 



— 



- 

SALES 


1921 


II921 

lOec. 


31 


{Continued  on  next  page.) 


6012 


OC 


Assignment  4,  Page  17 


NOTES  RECEIVABLE 


1921 
Dec. 

31 

4000 

00 

1921 

Dec. 

31 

1000 

00 

NOTES  PAYABLE 


1921 
Dec. 

31 

-- 

1400 

00 

1921 

Dec. 

31 



— 

4300 

00 

EXPENSE 


1921 
Dec. 

31 



— 

101 

1921 
75 

— 

INCOME  (OTHER  THAN  SALES) 


DATE 

ITEMS 

Fol. 

^ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 

1921 
Dec. 

31 



67 

30 

ACCOUNTS  PAYABLE 


1921 
Dec. 

31 

550 

1921 
20  Dec. 

31 

1975 

00 

ACCOUNTS  RECEIVABLE 


1921 

Dec. 

31 

5173 

90 

11921 

Dec. 

31 

1415 

17 

PREVIOUS  INVENTORY 


1921 
July 

1 

2500 

1921 
00 

2.  From  the  ledger  accounts  of  John  Singer's  business  on  pages  2,  3 
and  4,  determine  what  the  transactions  were  for  the  month  of  September. 
Find  the  corresponding  credit  for  every  debit.  List  the  transactions  ac- 
cording to  the  dates  disregarding  the  balances  of  September  1.  For  ex- 
ample: The  transaction  for  September  3  should  be  shown  thus: 

Sept.  3,  $50  paid  for  rent,  debit  to  Expense,  credit  to  Cash,  etc. 
Assigrmnent  4,  Page  18 


Higher  Accountancy 

0«  IP 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  5 

THE  JOURNAL 


A  MAN  simply  cannot  run  his  business  or  depart- 
^  ^^  ment  on  the  facts  of  yesterday.  I  need  only  mention 
modern  accounting  facts,  credit  facts,  organization  facts, 
employment  facts,  market  facts,  executive-control  facts, 
and  even  the  larger  economic  facts  which  have  a  pro- 
found  influence  upon  management  policies. 

F.  A.  Seiberling 

President,  Seiberling  Rubber  Company 


LaSalle  Extension  University 

Chicago 


NHA-S 
11-62 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright   1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


THE  JOURNAL 

THE  BOOK  OF  ORIGINAL  ENTRY 

The  journal  is  commonly  referred  to  as  the  "book  of  original  entry," 
in  contrast  with  the  ledger,  which  is  often  called  the  "book  of  final  entry." 
In  taking  up  this  assignment,  which  is  devoted  entirely  to  the  journal,  it 
is  important  that  you  understand  clearly  at  the  start  what  the  journal  is 
and  how  valuable  the  principle  of  the  journal  has  become  to  accounting. 

Modern  Journal  Developed  from  Old  Day  Book.  Broadly  speaking,  the 
journal  is  a  book  in  which  all  daily  transactions  are  first  recorded  before 
they  are  entered  in  the  ledger. 

In  the  early  history  of  bookkeeping  all  transactions  were  written  oat 
in  detail  in  a  "day  book,"  so  called  because  it  was  a  record  from  day  to 
day  of  all  transactions  as  they  occurred.  The  day  book  was  regarded  as 
an  important  book,  since  it  contained  the  complete  original  record  of  each 
transaction  made  at  the  time  the  transaction  took  place. 

With  the  advance  of  accounting  practice  a  time-saving  method  was 
developed  by  which  entries  were  made  in  a  book  with  two  money  columns, 
one  for  debits,  the  other  for  credits.    This  book  was  called  a  "journal." 

The  modern  journal  is  as  much  a  daily  record  of  the  day's  business  as 
the  unwieldy  day  book  was,  the  only  difference  being  that  the  journal 
offers  an  easier  and  more  direct  method  of  recording  the  transactions, 
and  is  a  record  which  guards  better  against  errors  than  the  day  book. 

In  addition  to  being  a  complete  record  of  daily  transactions,  the  journal 
is  also  preferred  as  a  source  of  authority  and  evidence  in  court. 


ADVANTAGES  OF  JOURNAL 

There  are  five  advantages  in  using  the  journal,  which  may  be  men- 
tioned briefly. 

1.  Journal  Is  Timesaver.  The  accountant  can  save  time  by  using  the 
journal.  If  he  entered  every  transaction  directly  and  immediately  into 
the  ledger  accounts,  he  would  have  to  hunt  up  certain  of  the  ledger  ac- 
counts many  times  during  the  day.  Wouldn't  it  be  a  better  plan  and  a 
saving  of  time  to  analyze  each  transaction  as  it  takes  place,  make  a  special 
record  of  it  in  a  book  provided  for  this  purpose,  and  then  later,  at  a  con- 
venient time,  record  these  facts  in  the  proper  ledger  accounts? 

2.  Journal  Reduces  Errors.  If  you  first  analyze  the  transactions  in  the 
journal  to  determine  the  proper  debits  and  credits  to  be  made,  you  are 
less  likely  to  make  errors  in  the  ledger.  In  the  journal  analysis  the  ac- 
count or  accounts  to  be  debited  and  credited  are  specifically  stated,  and 


the  debits  and  credits  are  shown  side  by  side  on  the  same  sheet.  As  a 
result,  it  is  very  probable  that  the  debit  and  credit  amounts  will  be  earned 
to  the  ledger  correctly. 

Furthermore,  the  analysis  of  transactions  and  the  entries  in  the  ledger 
are  two  separate  operations.  If  you  give  special  attention  to  each  of  these 
at  different  times,  your  work  is  likely  to  be  more  accurate. 

3.  Journal  Records  Every  Transaction.  If  you  enter  the  transaction 
directly  into  the  ledger  accounts,  you  split  up  the  record  immediately  into 
two  parts,  the  debit  being  placed  in  one  account  and  the  credit  in  another ; 
there  is  no  one  place  in  which  the  entire  transaction  has  been  recorded. 
The  journal  provides  such  a  place.  All  the  facts  of  a  particular  transac- 
tion, such  as  the  date,  the  accounts  affected,  the  debits  and  credits,  and 
the  amounts,  can  thus  be  found  in  the  journal  at  any  time. 

4.  Day-by-Day  Record.  It  is  not  easy  to  ascertain  from  the  ledger 
what  has  happened  month  by  month  or  even  day  by  day.  Consequently 
the  course  of  the  business  cannot  be  studied  by  merely  using  the  ledger. 
You  must  also  have  the  journal,  which  forms  a  sort  of  "running  history" 
of  the  business. 

5.  Aids  in  Locating  Errors.  If  at  the  end  of  an  accounting  period  a 
trial  balance  is  taken  and  found  to  be  out  of  balance,  it  would  be  difficult 
to  find  errors  without  the  aid  of  the  journal.  Suppose  that  you  as  pro- 
prietor bought  show  cases  for  $75.00  cash,  and  that  you  entered  this 
transaction  directly  into  the  ledger  accounts  without  first  setting  up  the 
complete  transaction  in  the  journal.  Let's  assume  that  in  making  the 
ledger  entries  you  debited  Office  Furniture  Account  for  $75.00  and  credited 
Cash  Account  for  $7.50,  making  an  error  in  the  Cash  Account.  Naturally 
at  the  end  of  the  accounting  period  your  accounts  would  be  out  of  balance, 
and  you  would  find  it  difficult  to  locate  your  error.  But  if  you  had  used  a 
journal  and  had  recorded  this  transaction  in  the  journal,  showing  the  debit 
and  credit  amounts,  you  could  have  checked  up  the  ledger  accounts  debited 
and  credited  with  the  journal  debits  and  credits,  and  thus  have  located 
your  error  more  easily. 

For  the  reasons  mentioned  here,  the  necessity  and  advantage  of  hav- 
ing a  journal  are  obvious.  Every  business  requires  at  least  two  books  of 
record,  the  ledger  and  the  journal. 

The  Journal  Page.  The  form  of  the  journal  is  very  simple.  It  contains 
pages  ruled  horizontally,  so  that  names  and  figures  may  be  kept  in  line. 
It  should  have  two  money  columns  at  the  right-hand  side.  Figure  1  shows 
the  customary  ruling. 

In  the  "Explanation"  column  is  recorded  the  anal3^sis  of  the  transac- 
tion. The  account  to  be  debited  is  placed  on  line  1.  On  the  second  line, 
beneath,  and  indented,  is  written  the  name  of  the  account  to  be  credited. 
This  arrangement  for  debits  and  credits  conforms  to  the  arrangement  of 
debits  and  credits  in  the  ledger.  Immediately  below  these  account  names 
is  written  an  explanation  of  the  important  details  of  that  particular  trans- 
action. ^        ,   ^ 

Assignment  5,  Page  2 


JOURNAL 


DATE 

Fol. 

EXPLANATION 

DEBITS 

CREDITS 

1921 
Aug.  2 

2 

Cash 

5,0CC 

OC 

2 

Arthur  Andrews,  proprietor 

5,000 

00 

Original  investment  in 

retail  hardware  business. 

— 

The  Journal  Illustrated. 

Figure  1. — ^This  illustration  shows  the  simplicity  of  the  journal  pages.  Each  of  the  five 
columns,  as  you  note,  is  used  for  a  special  purpose.  The  "Date"  column  is  for  the  year, 
month,  and  day.  Sometimes  the  date  column  is  omitted  and  the  date  is  entered  in  the 
center  of  the  page.  The  "Folio"  column  is  for  the  ledger  page  to  which  the  item  is 
transferred.  Note  how  the  amounts  are  placed.  The  "Explanation"  column  also  has 
an  important  function,  as  explained  in  the  discussion. 

Wording  of  Journal  Entry  Explanation.  The  wording  of  the  journal  en- 
try explanations  is  somewhat  a  matter  of  experience.  This  may  be  said 
in  general: 

Do  not  make  the  explanation  too  long  or  detailed.  Do  not 
make  it  so  short  that  the  record  will  be  incomplete  because  of  the 
omission  of  important  facts.  Names,  dates,  and  addresses  are 
important.  The  record  should  be  so  complete  and  clear  that  any- 
one reading  it  will  know  exactly  what  transaction  has  taken  place. 
Public  accountants  often  ascribe  much  of  their  difficulty  to  poorly 
made  or  incomplete  explanations  accompanying  entries. 

It  is  customary  to  leave  one  line  blank  between  transactions  so  as  to 
avoid  confusion  in  reading.  Thus  the  record  of  each  transaction  is  set  out 
as  a  separate  and  complete  unit. 

WHAT  IS  MEANT  BY  "JOURNALIZING"  AND  "POSTING" 
The  use  of  the  journal  includes  two  definite  and  separate  operations: 

1.  Journalizing 

2.  Posting 

"Journalizing"  means  the  entering  of  the  debit  and  credit  for  each 
transaction  in  the  journal.  Posting  consists  of  transferring  these  debits 
and  credits  to  the  ledger  accounts.  To  illustrate  both  journalizing  and 
posting  we  shall  take  the  transactions  of  a  small  hardware  store  for  the 
first  fifteen  days  of  August,  1921.  These  transactions  will  be  journalized 
and  Dosted. 


Assignment  5,  Page  3 


Transactions 

Aug.  2  Arthur  Andrews  invests  $5,000.00  in  cash  in  a  retail  hardware  business. 

2  Buys  hardware  from  Western  Hardware  Company,  for  cash,  $2,400.00. 

3  Pays  rent  for  August  1-15,  $46.00. 

4  Buys  merchandise  from  Central  Tool  Works,  on  a^icount,  for  $375.00 — 
terms,  2  per  cent  in  10  days. 

5  Buys  delivery  wagon  and  horse,  for  cash,  $425.00. 

6  Sells  goods,  for  cash,  $150.00. 

8  Sells  merchandise,  on  account,  to  E.  T.  Simon,  $37.50 — tenns,  2  per  cent 
in  10  days. 

9  Pays  account  with  Central  Tool  Works,  taking  advantage  of  discount. 
9     Buys  ofRce  furniture  from  Goodyear  Supply  Company,  on  account,  for 

$180.00. 

Cash  sales  for  the  day  amounted  to  $175.00. 

10  Pays  $24.00  for  advertising. 

11  Cash  sales,  $180.00. 

12  Farmers  Elevator  Company  buys  $250.00  worth  of  hardware  and  gives  a 
60-day  promissory  note  for  that  amount. 

Cash  sales,  $160.00. 

13  Pays  $50.00,  clerk's  salary. 
Cash  sales,  $134.60. 

15     E.  T.  Simon  pays  his  account,  taking  advantage  of  the  dipcount. 
F.  Walker  buys,  on  account,  $50.16. 
Cash  sales,  $120.00 

Two  steps  in  Journalizing.  Journalizing  of  transactions  consists  of 
two  steps: 

1.  Determine  the  accounts  to  be  debited  and  credited. 

2.  Enter  the  debit  and  credit  in  the  proper  columns  of  the 
journal. 

Correct  posting  depends  upon  correct  journalizing.  If  the  transaction 
is  not  properly  analyzed,  the  posting  may  be  mechanically  correct,  but  the 
accounts  will  not  show  the  facts  correctly. 

Very  often  the  easiest  way  of  learning  how  to  do  a  thing  is  to  watch 
someone  else  do  it  and  then  try  it  yourself.  You  can  learn  the  process  of 
journalizing  in  this  same  way. 

Of  the  nineteen  transactions  in  Arthur  Andrews'  business,  we  have 
journalized  eight  in  Figure  2.  You  are  asked  to  journalize  the  other 
eleven  transactions  as  your  solution  for  Problem  1,  stated  at  the  end  of  the 
assignment. 

The  Posting  Process.  Now  take  the  first  journal  entry  which  we  have 
given,  and  note  how  the  items  are  posted  from  the  journal  to  the  ledger 
accounts  in  Figure  3. 

Assignment  5,  Page  4 


I 



!c zl 

j  DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS   jj 

'  1921 
Auk.  2 

2 

Cash 

5 

0 

0 

0 

00 

2 

Arthui*  Andrev/R,  Droprietor 

5 

0 

0 

0 

GO 

Oris;inal  investment  in 

Retail  hard.Yare  business 

2 

2 

Purcliases 

2 

4 

0 

0 

00 

2 

Cash 

2 

4 

0 

0 

00 

Merchandise  frdn  Vi'estern  Hardware  Co. 

3 

2 

Expense 

4 

6 

00 

2 

Cash 

4 

6 

00 

Rent  of  Store  for  August  1-15 

i 

4 

2 

Purchases 

37 

5 

00 

2 

Accounts  Payable 

3 

7 

5 

00 

Mercjiandise  from  Central  Tool  Works. 

Terms,  2  Per  Cent,  10  Days 

i 

5 

2 

Delivery  Equipment 

4: 

2 

5 

00 

2 

Cash 

4 

2 

5 

ooj 

Bought  Horse  and  "'.''agon                   | 

6 

2 

Cash 

1 

5 

0 

00 

2 

Sales 

1 

5 

0 

00 

Total  Cash  Sales  for  Day 

■ -     -    1 

8 

2 

Accounts  Receivable 

3 

7 

50 

2 

Sales 

5 

7 

d: 

!-.!erchandise  on  Account  to  E.  T,  Sir-on 

Terms,  2  Per  Cent,  10  Days 

i 

i 

9 

2 

Acoo-jnts  Payable 

3 

7 

5 

00 

1 

2 

Cash                              1 

3 

6 

7 

50| 

Purchase  Discoionts 

j 

7 

50' 

Settlement  of  Account  v,-ith  Central  Tool 

] 

■."orks,  2  Per  Cenc  Discount               j 

1 

1 

— 1 

-! 

1 

' 

JOURNALIZINQ   ILLUSTRATED. 

Figure  2. — Note  carefully  the  general  appearance  of  this  journal  page,  and  you  will 

understand  how  to  set  up  the  eleven  journal  entries  required  in  Problem  1.     Every 

journal  page  should  be  neatly  set  up.    It  should  be  easily  legible  and  contain  all  the 

essential    details   of   every   transaction. 


Assignment  5,  Page  'i 


Transaction  1.    The  first  journal  entry  is  for  the  original  investment 
of  $5,000.00. 

JOURNAL 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS      J 

1921 

2 

2 

Cash 

/ 

I 

0 

0 

0 

00) 

2 

Arthur  Andrews,  proprietor 

/ 

^50 

0 

0 

oSi 

Orieinal  investment  in  retail                            / 

f 

Hardware  business.                                               / 

/ 

/ 

/ 

/ 

1 

/ 

'4 

1 

Ll 

EDGER 

Cash    / 

/ 

/• 1 11 

DATE 

ITEMS 

Fol.      , 

DEBITS 

HDATE 

ITEMS 

Fol. 

/  CREDITS     1 

1921 
Rue. 

2 

lares tment 

1 

r 

S" 

0 

0 

0 

S3 

19'^] 

<, 

— 

r-' 

1921 

c 

A.: 

>: 

TA 

(aJ 

bhi 

r  Andrews) 

1921 

Auk 

2 

Investment 

1 

/f 

0 

0 

0 

oo] 

- 

■^ 

Posting  Process  Illustrated — Transaction  1. 

Figure  3. — ^The  posting  process  is  really  very  simple.    Note  how  the  cash  debit  in  the 

journal  is  posted — transferred  or  copied — as  a  debit  in  the  Cash  Account,  and  the  credit 

in  the  journal  entered  as  a  credit  in  the  Capital  Account. 


Assignment  5,  Page  6 


Transaction  2.  The  second  journal  entry,  shown  in  Figure  4,  is  for  a 
purchase  of  merchandise  for  cash.  Note  how  we  have  posted  it  to  the 
accounts : 


JOURNAL 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS 

1921 

Aug. 

2 

2 

Purchases 

2,400 

00 

2 

Cash 

2,400 

00 

Merchandise  from  Western  Hardware  Co. 

LEDGER 

Purchases 


DATE 

ITEMS 

Fol. 

v/ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 
Aug. 

2 

Cash 

1 

2,400 

00 

1921 

Cash 


1921 
Aug 

2 

Investment 

1 

5,000 

00 

1921 
Aug. 

2 

Purchases 

1 

2,400 

00 

CAPITAL  (Arthur  Andrews) 


1921 

1923 
Aug. 

2 

Investment 

1 

5,000 

00 

Posting  Transaction  2. 

Figure  4. — Observe  how  the  debit  of  the  journal  is  posted  as  a  debit  to  the  Purchases 
Account,  and  the  credit  as  a  credit  to  the  Cash  Account.  The  Cash  and  Capital  accounts 
appearing  here  contain  also  the  first  transaction.  The  Purchases  Account  is  the  new 
account  set  up  to  take  care  of  the  debit  for  Transaction  2,  and  the  credit  is  entered  in 
the  original  Cash  Account.     The  Capital  Account  is  not  changed  by  Transaction  2. 


Assignment  5,  Page  7 


Transaction  3.     The  third  journal   entry  was  for  payment  of  rent, 
?46.00.    It  is  posted  as  shown  in  Figure  5, 

JOURNAL 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS 

1921 
Aug. 

3 

2 

Expense 

46 

OC 

2 

Cash 

46 

00 

Rent  of  Store  for  August  1-15. 

LEDGER 

Expense 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Foi. 

v/ 

CREDITS 

1921 
Aug. 

3 

Cash 

1 

46 

OC 

1921 

- 

Cash 


1921 

Aug. 

2 

Investment 

1 

5,000 

OC 

1921 

Aug. 

2 

Purchases 

1 

2,400 

00 

3 

Rent 

1 

46 

00 

Purchases 


1921 
Aug. 

2 

Cash 

1 

2,400 

00 

1921 

Capital  (Arthur  Andrews; 


1921 

1921 

Aug. 

2 

Investment           1 

5,000 

GO 

Posting  Transaction  3. 

Figure  5. — Transaction  3  is  posted  as  a  debit  to  the  Expense  Account  and  a  credit  to 

the  Cash  Account.    A  new  account  must  of  course  be  set  up  for  Expense,  in  which  the 

debit  is  entered.     The  credit  is  set  up  in  the  original  Cash  Account. 


Assignment  5,  Page  8 


In  Problem  2,  stated  at  the  end  of  this  assignment,  you  are  expected 
to  post  all  the  journal  entries,  both  those  which  we  have  given  you  in 
Figure  2  and  those  that  you  have  set  up  in  your  solution  for  Problem  1. 
We  have  shown  you  how  to  post  the  first  three  journal  entries.  Complete 
the  posting  and  take  a  trial  balance  of  balances  of  your  accounts.  If  your 
work  is  correct,  your  trial  balance  debits  and  credits  will  amount  to 
$6,414.76. 

Underlying  Principle.  In  this  process  of  journalizing  and  posting 
transactions,  we  have  been  following  an  important  principle  of  accounting 
procedure  that  you  will  want  to  remember  thru  all  your  accounting  prac- 
tice, viz.:  No  entry  should  be  made  in  the  ledger  except  as  it  is  posted 
from  some  book  of  original  entry. 

In  other  words,  the  final  record — the  ledger  entries — which  must  nec- 
essarily be  brief,  must  be  supported  by  entries  giving  all  important  facta 
in  detail,  and  representing  a  diary  of  the  transactions  as  they  occur. 

Posting  Incomplete  without  Cross  Reference.  The  process  of  postmg 
is  not  complete  until  you  have  recorded  in  the  ledger  accounts  the  number 
of  the  journal  page  on  which  the  transaction  was  first  entered.  Likewise 
in  the  journal,  the  ledger  page  to  which  the  entry  was  posted  should  be 
indicated. 

For  example,  take  the  first  transaction  in  Arthur  Andrews'  business  as 
it  appears  in  the  journal.  In  the  folio  column  of  the  journal  the  page  of 
the  ledger  on  which  the  cash  account  appears  is  written,  page  2. 

The  page  of  the  ledger  on  which  the  proprietor's  account  appears  is 
also  written  in  the  folio  column  of  the  journal  on  the  same  line  with  Arthur 
Andrews. 

In  the  ledger  accounts  you  will  also  find  the  page  of  the  journal  from 
which  the  items  are  posted. 

In  making  your  postings  be  careful  to  enter  the  page  numbers  prop- 
erly in  the  journal  and  ledger,  for  each  posting,  as  we  have  done  for  the 
first  three  transactions. 

Assume  that  all  journal  entries  are  on  page  1  of  the  journal  and  all 
ledger  accounts  on  page  2  of  the  ledger. 

Thus  a  complete  cross  reference  is  effected,  and  it  is  possible  to  trace 
every  transaction,  either  from  the  journal  to  the  accounts  in  the  ledger, 
or  backward  from  either  account  into  the  journal.  In  the  journal  you  have 
the  ledger  pages,  and  in  the  ledger  you  have  the  journal  pages. 

In  case  some  error  has  been  made  in  posting,  either  by  omitting  an 
entry,  by  posting  the  incorrect  amount,  or  by  posting  an  amount  into  a 
wrong  account,  the  error  can  easily  be  located  by  going  back  to  the  original 
entry. 

Frequently  it  is  necessary  to  get  detailed  information  on  a  transaction 
because  of  some  complaint  of  dissatisfaction  from  a  customer.  If  the  ap- 
proximate date  of  the  transaction  is  known,  you  can  look  it  up  in  the  jour- 

AssigTiment  5,  Page  9 


iial;  or  if  the  date  is  not  known,  and  the  nature  of  the  transaction  is 
known,  j^ou  may  be  able  to  locate  it  in  one  of  the  accounts  that  would  be 
affected  and  trace  it  back  to  the  original  entry  in  the  journal.  In  either 
case,  the  cross  reference  would  help  you  to  obtain  the  desired  information. 

How  to  Save  Time  Posting  from  Journal.  After  the  transactions  are 
carefully  analyzed  and  the  proper  debits  and  credits  shown  in  the  journal, 
it  is  comparatively  easy  to  post  them  to  the  ledger.  Various  methods  may 
be  used  in  practice.  The  most  accurate  and  the  shortest  way  should  b& 
adopted.  Time  can  be  saved  by  posting  first  all  the  debit  items  that  are 
to  be  entered  in  one  account,  at  one  and  the  same  time,  while  the  ledger 
page  of  that  account  is  open  before  you.  For  example,  you  would  go  thru 
all  your  journal  entries  and  pick  out  all  cash  debits.  These  are  entered 
in  the  Cash  Account  at  one  time ;  then  you  can  turn  to  the  Purchases  Ac- 
count, which  probably  appears  on  a  different  page  of  the  ledger,  and  post 
all  debits  to  the  Purchases  Account,  etc.  After  the  debits  for  all  accounts 
have  been  entered,  you  would  proceed  to  enter  all  credits  in  the  same  way, 
referring  to  each  account  only  once  and  making  all  credits  to  each  account 
while  that  particular  page  of  the  ledger  is  open. 

When  to  Post  from  Journal  into  Ledger.  In  practice,  posting  may  be 
done  periodically — every  day,  every  few  days,  or  once  a  week,  depending 
upon  the  number  of  transactions  to  be  posted.  All  transactions  for  the 
period,  however,  must  be  posted  before  statements  of  account  are  rendered 
to  customers.  It  is  better  not  to  delay  posting  too  long.  The  accounts 
with  customers  and  creditors  should  be  kept  up  to  date.  Large  concerns 
employ  posting  clerks,  who  spend  all  their  time  posting  sales  and  pur- 
chases. Much  time  in  posting  can  be  saved  by  using  special  journals,  one 
for  all  cash  transactions,  another  for  purchases  on  account,  and  another 
for  sales  on  account.  But  these  will  be  fully  explained  in  Assignments 
7  and  8. 

THE  IMPORTANT  PRINCIPLES  OF  THIS  ASSIGNMENT 

In  conclusion  note  again  the  main  points  as  they  have  been  presented 
in  Assignment  5. 

First.    The  journal  is  essential  to  every  system  of  accounts,  because 
of  several  reasons: 

1.  It  saves  time 

2.  It  helps  to  reduce  errors 

3.  It  provides  a  complete  record  of  every  transaction 

4.  It  forms  a  sort  of  running  history  of  the  business 

5.  It  aids  in  locating  errors. 

Second.     The  journal  appears  in  standard  form.     The  pages  are  ruled 
and  columns  are  used  for  convenience  and  accuracy. 

Third.     There  are  two  steps  in  journalizing. 

1.  Analyze  the  transaction  into  its  debit  and  credit. 

2.  Enter  the  debit  and  credit  in  the  proper  columns  of  the  journal. 

Assignment  5,  Page  10 


Fourth.  After  transactions  are  journalized  they  must  be  posted 
— that  is  the  debits  and  credits  are  transferred  to  the  accounts  in 
the  ledger. 

Fifth.  The  most  important  principle  of  the  entire  assignment  is  given 
on  page  5.    It  is  emphasized  again  in  Assignment  6.    It  is  as  follows : 

No  entry  should  be  made  in  the  ledger  except  as  it  is  posted 
from  some  book  of  original  entry. 

With  these  principles  thoroughly  mastered,  you  will  be  better  able  to 
set  up  satisfactory  solutions  of  the  problems. 


(Problems  on  next  page.) 


Assig:nment  5,  Page  11 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  5 

Prepare  and  send  in  to  the  University  solutions  to  the  following  prob- 
lems. These  problems  are  based  upon  the  discussion  in  this  assigiiment. 
The  solutions  for  them  should  be  set  up  on  the  ruled  paper  provided. 

Problem  3  is  a  test  on  some  important  principles  of  Assignments  3 
and  4. 

These  problems  represent  practical  situations,  and  for  this  reason  they 
should  receive  your  best  efforts. 

1.  Set  up  the  journal  entries  for  the  transactions  on  page  4. 

2.  Post  the  journal  entries  for  the  two  weeks'  period  to  the  ledger 
accounts  as  required  on  page  9. 

8.  Here  is  a  trial  balance  which  was  prepared  by  E.  F.  Thompson, 
the  proprietor  of  a  small  retail  business,  December  31,  1921.  The 
trial  balance  is  out  of  balance.  The  amounts  themselves  ai;e  cor- 
rect. That  is,  Mr.  Thompson's  ledger  accounts  are  right,  but  he 
has  made  errors  in  setting  up  the  trial  balance.  You  are  asked 
to  find  the  errors  and  prepare  and  send  in  the  trial  balance  in 
correct  form. 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  flWfiT 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  6 

CLOSING  THE  LEDGER  BY 
JOURNAL  ENTRIES 


/^UR  MEN  develop  themselves.  I  give  them  a  free  rope 
^-^and  a  long  one.  If  they  are  too  small  for  their  jobs 
they  get  tangled  up  in  the  rope  and  it  trips  them.  If  they 
are  too  big  they  fashion  the  rope  into  a  ladder  and  climb 
higher.  Big  men  are  only  little  men  given  a  fair  chance 
to  grow. 

J.  ogden  armour 

President,  Armour  &  Co. 


LaSalle  Extension  University 

Chicago 


NHA-6 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 
.5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — ^The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissorv  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Adjustment  for  Depreciation  and  Doubtful  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — The  Perpetu.vl  Inventory 

25.  Factory  Accounting — Distribution  of  Overhead  Costs 

26.  Classification  of  Accounts 

17 .  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analyses  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


CLOSING  THE  LEDGER  BY  JOURNAL  ENTRY 

The  general  principle  that  no  entry  should  be  made  in  the  ledger  which 
has  not  been  previously  recorded  in  a  book  of  original  entry,  has  an  im- 
mediate and  direct  bearing  upon  this  assignment  on  "Closing  the  Ledger 
by  Journal  Entry." 

We  want  to  emphasize  this  principle  at  the  outset  and  give  you  a  few 
of  the  reasons  why  it  is  desirable,  as  well  as  important,  that  you  journalize 
not  only  all  transactions  which  result  from  ordinary  trading  operations, 
but  also  all  transactions  which  may  result  from  adjustments  you  yourself 
may  make  in  the  records. 

Always  One  "Best"  Way.  Generally  speaking,  there  are  many  ways 
of  performing  almost  any  operation  you  may  think  of.  But  among  the 
many  ways,  one  is  always  the  best  and  the  safest.  The  man  who  can, 
either  thru  theory  and  training  or  thru  actual  practice  and  tested  ex- 
perience, determine  for  himself  which  is  the  best  way  and  then  use  it, 
soon  becomes  proficient  in  that  operation  and  is  known  as  an  expert. 

Closing  the  ledger  accounts  is  no  exception,  for  there  are  more  ways 
than  one  of  accomplishing  this  process,  but  there  is  only  one  best  and 
absolutely  safe  way,  namely:  Make  no  entries  in  the  ledger  unless  they 
have  been  previously  recorded  in  the  journal. 

Some  accountants  insist  that  it  is  unnecessary  to  do  this.  Instead  of 
making  closing  journal  entries,  they  enter  the  balances  directly  into  the 
accounts  affected.  The  best  practice  is  against  this  method  and  in  favor 
of  omitting  no  entries  or  explanations  from  the  journal  when  such  omission 
might  contribute  toward  errors  in  the  closing  process.  This  is  the  one 
method  which  leaves  no  loophole  for  error  and  makes  every  provision  for 
making  assurance  doubly  sure.  Only  those  methods  and  practices  which 
guarantee  absolute  certainty  should  be  encouraged  or  used. 

On  the  pages  immediately  following  you  will  find  the  advantages  of 
the  journal-entry  method  of  closing  the  ledger  enumerated  and  the  method 
fully  illustrated  and  explained. 

The  Advantages  of  the  Journal-Entry  Method.  Chief  among  the 
several  important  advantages  of  setting  up  complete  closing  entries  in  the 
journal  before  they  are  actually  entered  in  the  accounts,  are  the  following: 

1.  The  analysis  in  the  journal  of  debits  and  credits  for  each  of  the 
closing  steps,  insures  greater  accuracy  in  making  the  entries  in  the  ledger. 

2.  Only  when  such  preliminary  analysis  of  each  closing  step  is  made 
and  entered  in  the  journal  will  there  be  a  complete  record  of  each  step 
in  the  process  of  closing  the  ledger. 

Public  accountants  especially  realize  the  big  advantage  of  closing  the 
ledger  by  the  journal-entry  method.  When  they  check  up  a  set  of  books, 
they  are  careful  to  note  whether  the  closing  entries  have  been  properly 

NHA-6 

(9-162) 


made.  Any  auditor  in  going  over  a  set  of  books  will  want  to  know  what 
method  has  been  used  in  closing  the  accounts.  If  each  of  the  closing 
entries  has  been  journalized,  the  journal  entries  will  indicate  each  step 
clearly,  and  the  auditor  can  tell  at  a  glance  how  the  inventories  were 
adjusted  and  what  method  was  used.  A  complete  and  satisfactory  veri- 
fication is  thus  made  possible. 

So  much  for  the  reasons  why  closing  the  ledger  by  journal  entry  is  the 
safest  method  for  the  accountant  to  use.  Now  let  us  take  up  the  mechanics 
of  the  method  itself. 

John  Singer's  Accounts  before  They  Are  Closed.  We  presented  several 
important  accounting  principles  in  Assignment  4  by  setting  up  John  Singer 
in  the  potato  business  and  analyzing  his  records.  These  same  records  will 
now  be  used  to  show  what  journal  entries  should  be  made  before  the  ledger 
is  closed. 

SALES 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Fol. 

v/ 

CREDITS 

1921 

— 

1921 

Sept. 

10 

Acme  Grocery  Co. 

330 

00 

16 

Franklin  &  Smith 

415 

00 

— 

27 

Acme  Grocery  Co. 

542 

24 

PURCHASES 


1921 
Sept. 

5  Cash 

450 

00 

1921 

20 

Wells  Potato  Farm 

224 

20 

26 

Cash,  Freight 

47 

50 

EXPENSES 


i92r 

Sept. 

3 

Cash,  Rent 



50 
10 

oc 
oc 

00 

i921 

9 

Cash,  Stationery 

30 

Cash,  Salary 

115 

30 

Cash,  Salary 

170 

00 

INCOME 


1921 

— 

1921 
Sept. 

28 

Cash,  Empty  Barrels 

10 

00 

(Accounts  continued  on  next  vage.) 


Assignment  6,  Page  2 


INVENTORY 


DATE 

ITEMS 

Fol. 

k/ 

DEBITS 

DATE 

ITEMS 

Fol. 

v/ 

CREDITS 

1921 
Aug. 

31 

Goods  on  Hand 

112 

00 

1921 

1 

Nominal  Accounts  and  Inventory 

Figure  1.    We  have  reproduced  here  only  the  nominal  accounts  and  the  inventory  ac- 
count for  John  Singer's  business,  because  they  are  the  only  accounts  that  are  affected 
by  the  closing  process.     With  these  accounts  before  you,  you  are  ready  to  set  up  the 
journal  entries  for  the  closing  process. 

Current  Inventory.  One  thing  more  is  necessary.  We  cannot  close  the 
ledger  without  knowing  the  amount  of  the  current  inventory ;  that  is,  how 
much  stock  Singer  had  on  hand  September  30.  By  actual  count  he  had 
$96.00  worth  on  September  30.  But  his  Inventory  Account  showed  a  debit 
of  $112.00  as  potatoes  on  hand  August  31.  Therefore,  an  adjustment 
(which  is  pureiy  an  internal  transaction  on  the  books)  is  necessary  in 
order  that  the  books  will  show  the  actual  facts  for  September  30. 

To  make  this  adjustment  we  must  credit  the  Inventory  Account  with 
the  amount  of  the  previous  inventory,  $112,  and  debit  the  Trading  Account 
with  the  same  amount.  The  current  inventory  of  $96.00  is  set  up  as  a  debit 
to  the  Inventory  Account  and  a  credit  to  the  Trading  Account.  As  we 
have  said,  some  accountants  might  make  these  adjustments  directly  in 
the  ledger,  but  it  is  better  to  enter  them  in  the  journal  first,  as  shown  in 
Figure  2. 

How  the  Journal  Entry  Figures  Are  Determined.  The  first  question  that 
comes  up  in  your  mind  is  very  likely  to  be,  how  we  determine  the  amount 
of  each  of  these  entries. 

1.  The  previous  inventorj^  $112.00,  appears  in  the  Inventory  Account, 
August  31,  as  a  debit.  This  same  amount,  therefore,  must  be  credited 
to  the  Inventory  Account  to  close  the  Inventory  Account,  and  debited 
to  the  Trading  Account. 

2.  The  current  inventorv,  $96.00,  is  the  value  of  goods  on  hand  Septem- 
ber 30. 

3.  The  amount  of  purchases,  $721.70,  is  the  total  of  the  debit  items  in 
the  Purchases  Account. 

4.  The  amount  of  sales,  $1,287.24,  is  the  total   of  the   Sales   Account. 

5.  The  amount  of  expenses,  $345.00,  is  the  total  of  debits  in  the  Expense 
Account. 

6.  The  amount  of  income,  $10.00,  was  the  only  item  appearing  in  the  In- 
come Account. 

7.  The  amount  debited  to  Trading  and  credited  to  Profit  and  Lo^^s,  which 
is  $549.54,  is  the  balance  of  the  Trading  Account  after  giving  effect 
to  the  foregoing  entries. 

8.  The  amount  of  the  entry  required  to  close  Profit  and  Loss  into  Capital, 
is  found  by  considering  all  the  foregoing  entries. 


Assignment  ^,  Page  3 


DATE 

FOL. 

EXPL.\NAT!ON 

DFEIIS    '    CRSDiTS   | 

,                              i     .-_-  — . — . 1 

1921 
Sept, 

1 

r 

r- 

30 

2 

Trading 

1 

1 

•7 

GO  ' 

2 

■ 
Inventory 

] 

]. 

2 

00 

To  Transfer  the  Invintory  of  Aug.  31  to 

Trading  Account. 

ri 

2 

Inventory 

d 

6 

00 

2 

Trading 

'1 

9 

6 

00 

To  Record  the  Invenbory  of  Sept.  30 

II 

2 

Trading 

7 

?. 

1 

70 

Purchases 

7 

2 

1 

70 

To  Close  ?urc;iases  into  Tr?-.ding 

" 

2 

Sales 

1 

2 

8 

7 

■.ii 

2 

Trading 

1 

2 

8 

7 

24 

To  Close  Sales  into  Trading 

1 

» 

2 

Profit  and  Lobs 

3 

4 

5 

00 

2 

Expense 

3 

4- 

5 

03 

To  Close  Expense  Accovuit  into  Profit 

and  Loss 

1 

II 

2 

Income 

1 

0 

00 

2 

Profit  >md  Loss 

1 

0 

00 

To  Close  Income  Acco-ont  into  Profib 

and  Loss 

n 

2 

Tradin.q; 

5 

4 

9 

54 

2 

Profit  and  Loss 

c; 

4 

0 

54 

To  Close  Try.din,-,  Account  into  Profit 

and  Loss 

M 

2 

Profit  and  Loss 

2 

Capital 

2 

1 

4 

54 

To  Close  Profit  and  Loss  into  Capit',1 

2 

1 

4 

The  Closing  Process  Journalized 

Figure  2.  ^  These  journal  entries  show  you  how  to  proceed  in  closing  the  ledger.    First 

of  all,  adjust  the  inventories,  then  close  Purchases  and  Sales  accounts  into  Trading. 

Finally  close  the  Expense,  Income,  and  Trading  accounts  into  Profit  and  Loss. 


Assignment  6,  Page  4 


From  this  explanation  you  will  understand  how  the  amounts  are  de- 
termined for  the  journal  entries  preliminary  to  closing  the  nominal 
accounts. 

The  closing  journal  entries  should  be  made  before  the  accounts  are 
closed.  It  may  seem  to  you  more  natural  to  close  the  accounts  first  and 
then  record  the  entries  in  the  journal.  You  are  probably  saying  something 
like  this:  "We  must  close  the  accounts  first  in  order  to  determine  the 
amounts  for  the  journal  entries." 

This  is  not  the  case.  You  can  easily  determine  the  balance  of  the 
nominal  accounts,  including  the  Trading  and  Profit  and  Loss  accounts,  as 
we  have  shown. 

The  first  step,  then,  is  to  determine  these  amounts. 

The  second  step  is  to  make  the  journal  entries  for  the  closing 
process. 

The  third  step  is  to  post  these  journal  entries  to  the  accounts 
affected. 

Journal  Entries  Posted  to  the  Accounts.  You  are  already  familiar  with 
the  posting  process  from  your  study  of  Assignment  5.  Journal  entries  for 
the  closing  process  are  posted  in  exactly  the  same  way  as  any  other  jour- 
nal entries.  The  page  references  are  also  used  as  described  in  Assignment 
5;  that  is,  in  the  journal  the  pages  of  the  ledger  are  recorded,  and  in  the 
ledger  the  pages  of  the  journal  are  shown.  When  the  closing  entries  have 
been  properly  posted,  the  nominal  accounts  are  ruled,  as  indicated  in 
Figure  3. 

INVENTORY 


DATE 

ITEMS 

Fol. 

v/ 

DEBI 

rs 

DATE 

ITEMS 

Fol. 

v/ 

CREDITS 

1921 

Aug. 

31 

Goods  on  Hand 

1 
1 

— 

112 

00 
00 

1921 

Sept. 

30 

Closed  to  Trading 

1 

112 

00 

Sept. 

30 

Inventory 

96 

SALES 


1921 

Sept. 

30 

Balanced  Closed  to 

1921 

Sept. 

10 

Acme  Grocery  Co. 

1 

330 

00 

Trading 

1 

1,287 

24 

16 

Franklin  &  Smith 

1 

415 

00 

27 

Acme  Grocery  Co. 

1 

- 

542 
1,287 

24 
24 

1,287 

24 

(Accounts  continued  on  next  page.) 


Assignment  6,  Page  5 


PURCHASES 


1921 
Sept. 

5 

Cash 

450 

OC 

1921 
Sept. 

30 

Balance  to  Trading 

1 

i 

721 

70 

20 

Wells  Potato  Farm 

1 

224 

20 

26 

Cash,  Freight 

1 

47 

5C 

721 

70 

721 

70 

EXPENSE 


1921 

Sept. 

3 

Cash,  Rent 

1 

50 

00 

1921 

Sept. 

30 

Balance  to  Profit 

9 

Cash,  Stationery 

1 

10 

00 

and  Loss  Account 

1 

345 

00 

30 

Cash,  Salary 

1 

115 

00 

30 

Cash,  Salary 

1 

170 

00 

00 

345 

OC 

345 

INCOME 


192] 
Sept. 

30 

Balance  to  Profit 

1921 
Sept. 

28 

Cash,  Empty  Barrels 

1 

10 

00 

and  Loss  Account 

1 

10 

OC 

TRADING 


1921 

Sept. 

30 

Previous  Inventory 

1 

112 

OC 

1921 
Sept. 

30 

Current  Inventory 

1 

96 

00 

30 

Balance  of  Purchases 

1 

721 

70 

30 

Balance  of  Sales 

30 

Balance  to  Profit 

Account 

1 

1,287 

24 



— 

and  Loss 

1 

549 

54 

1,383 

24 

— 

1,383 

24 

PROFIT  AND 

LOSS 

1921 
Sept. 

30 

Balance  of  Expense 

1 

OC 

54 
54 

1921 
Sept. 

3C 
30 

Balance  of  Income 

1 

- 

Account 

345 

Account 

10 

00 

54 

30 

Net  Profit,  Carried 

Gross  Profit 

1 

549 

to  Capital  Account 

1 

214 

559 



- 

559 

54 

(Accounts  continued   on    nr.vt  imgc.) 


Assignment  G,  Page  6 


CAPITAL 


1921 

Sept. 

30 

laloHce  Dcwn 

1 

2,101 

54 

1921 

Sept. 

1 

Capital 

1 

1,887 

00 

30 

Net  Profit  for  Sept. 

1 

214 

54 

2,101 

54 

1 

2,101 

54 

Oct. 

Capital 

2T1OI 

54 

NoMiN.^L  Accounts  Closed 

Figure  3.  In  this  form  are  reproduced  the  ledger  accounts  as  they  will  appear  after 
the  journal  entries  of  Figure  2  have  been  posted.  Notice  the  way  in  which  these 
closed  accounts  are  ruled.     The  double  ruling  indicates  that  the  accounts  are  closed. 

Checking  Closing  Entries.  You  may  find  it  necessary  to  check  up  your 
closing  entries.  It  will  be  a  saving  of  time  and  effort  if  you  are  able  to 
trace  back  the  closing  entries  to  the  original  entries  in  the  journal,  for 
verification,  particularly  if  you  are  unable  to  strike  a  balance  after  closing. 


I\IAIN  POINTS  IN  THIS  ASSIGNMENT 

In  this  assignment  we  have  done  three  things. 

First — We  have  reemphasized  one  of  the  most  important  accounting 
principles,  namely:  "Make  no  entries  in  the  ledger  unless  they  have 
been  previously  recorded  in  the  journal."  We  have  shown  the  value 
of  this  principle  by  applying  it  to  the  process  of  closing  the  ledger. 

Second — We  have  shown  that  the  journal  method  of  closing  is  better  than 
the  direct  method,  for  two  reasons: 

1.  Closing  entries  in  the  ledger  will  be  more  accurate  if  each  closing 
step  is  first  analyzed  into  its  debit  and  credit  in  the  journal. 

2.  The  journal  method  provides  a  complete  record  or  history  of  the 
closing  process,  which  is  especially  valuable  to  auditors  and  other 
public  accountants. 

Third — The  mechanics  of  closing  the  ledger  by  journal  requires  three 
definite  steps: 

1.  Determine  the  amounts  to  be  journalized. 

2.  Enter  the  amounts  in  the  journal. 

3.  Post  the  journal  entries  to  the  accounts. 

These  three  points  have  been  illustrated  by  means  of  an  actual  situa- 
tion from  business.  We  have  shown  that  it  is  not  merely  a  theory  but  a 
practical  method  used  and  approved  by  accountants. 


Assignment  6,  Page  7 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  6 

In  the  problems  that  follow  you  will  find  situations  which  are  real 
tests  of  your  ability  to  close  a  ledger.  Send  in  your  solutions  to  all  the 
problems  for  criticism  and  grading. 

1.  In  the  discussion  of  this  assignment  we  have  journalized  the  closing 
entries  for  the  nominal  accounts  of  John  Singer's  business  as  presented 
in  Assignment  4.  We  have  also  posted  these  journal  entries  to  the  accounts 
and  closed  the  accounts. 

Now  we  are  going  to  ask  you  to  journalize  the  closing  entries  for 
Arthur  Andrews'  business,  described  in  Assignment  5.  The  following  trial 
balance  gives  you  the  balances  from  Mr.  Andrews'  ledger. 


Arthur  Andrews 
TRIAL  BALANCE  (before  closing) 

August  15,  1921 

DEBITS     CREDITS 

Capital  $5,000.00 

Cash $2,643.85 

*Purchases  2,775.00 

Expense  120.00 

Accounts  Payable  180.00 

Delivery  Equipment  425.00 

Sales 1,257.26 

Accounts  Receivable  50.16 

Purchase  Discounts  7.50 

Furniture  and  Fixtures  180.00 

Notes  Receivable  250.00 

Sales  Discounts .75 


1,444.76    $6,444.76 


inventory,  August  15,  1921,  amounts  to  $1,800.00. 


2.  Post  your  journal  entries  for  the  closing  process  to  the  ledger 
accounts.  It  will  be  necessary  for  you  to  set  up  these  accounts.  Close  and 
rule  the  accounts  in  the  proper  way. 

3.  Prepare  trial  balance  after  closing. 

4.  From  the  following  trial  balance  of  the  Northwestern  Coal  Com- 
pany, as  of  December  31,  1921,  prepare  the  journal  entries  necessary  in 
closing  the  nominal  accounts. 


Assignment  6,  Page  8 


TRIAL  BALANCE,  DECEMBER  31,  1921 

Northwestern  Coal  Company 

DEBITS        CREDITS 

Cash $  5,100.00 

Merchandise  Inventory,  Jan.  1,  1921  2,000.00 

Yards  and  Sheds 16,000.00 

Accounts  Receivable  5,200.00 

Notes  Receivable  3,200.00 

Delivery  Equipment  8,500.00 

♦Purchases  47,000.00 

Sales  Discounts  •  2,510.00 

Salesmen's  Salaries  4.300.00 

Office  Salaries  3,000.00 

Loss  on  Bad  Debts 1,200.00 

Delivery  Expense  8,500.00 

Sales  Allowances  1,500.00 

Taxes 275.00 

Insurance  590.00 

Interest  Paid  370.00 

Yard  Labor  2,500.00 

Advertising  1,000.00 

Sales S  78,000.00 

Mortgage  Payable  1,500.00 

Notes  Payable  3,000.00 

Interest  Earned  160.00 

Accounts  Payable  6,000.00 

Purchase  Allowances  1,600.00 

Capital  22,485.00 


^Merchandise  Inventory  Dec.  31,  1921,  $4,000.00. 


$112,745.00  $112,745.00 


Assignment   6.  P?ge  9 


Higher  Accountancy 

Ol  ID 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assig,nment  7 

THE  CASH  JOURNAL 


ATHORO  KNOWLEDGE  of  the  Science  of  Account- 
ing  as  distinguished  from  the  Art  of  Bookkeeping  is 
a  highly  important  part  of  the  modern  executive's  equip- 
ment. It  is  the  means  he  now  employs  in  exercising  effec- 
tive control  over  the  work  for  which  he  is  responsible. 

By  all  means  advise  the  young  man  of  to-day  to  master 
accounting  as  a  requisite  to  a  successful  business  career. 

R.  E.  CONNOLLY 

Treasurer,   Illinois  Central  Railroad  Comfjany 


LaSalle  Extension  University 

Chicago 


NHA-7 
(11-202) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension-  ITniversity 


THE  CASH  JOURNAL 

Importance  of  Cash  Transactions.  Analyze  any  business,  and  you  will 
find  that  certain  kinds  of  transactions  occur  more  frequently  than  others. 
For  example,  most  business  transactions  will  sooner  or  later  involve  cash. 
Merchandise  may  be  bought  on  account  and  sold  on  account.  Open  ac- 
counts with  customers  and  creditors  may  be  temporarily  settled  with 
promissory  notes  and  drafts,  but  the  final  settlement  is  made  by  the  pay- 
ment of  money. 

Methods  of  Safeguarding  Cash.  Since  cash  is  exchanged  so  frequently 
in  the  operation  of  a  business,  it  is  desirable  and  necessary  to  safeguard 
it  as  closely  as  possible.    This  may  be  accomplished  in  several  ways: 

1.  Wherever  it  is  possible,  one  man,  who  should  be  fully  bonded,  ought  to  be 
placed  in  control  of  the  cash  funds.  In  this  way  responsibility  will  be  limited 
to  one  person. 

2.  It  is  advisable  to  deposit  in  the  bank  all  cash  received  and  to  make  all  dis- 
bursements by  check.  Thus,  cash  receipts  and  disbursements  are  entered  on 
two  independent  records,  that  of  the  business  itself  and  also  that  of  the  bank. 

3.  The  third  way  of  controlling  cash  is  taken  up  in  this  assignment.  It  has  to 
do  with  the  records  of  the  business,  especially  with  the  cash  book  or  cash 
journal. 

Purpose  of  Cash  Book.  The  cash  book  is  a  journal,  in  which  only  CASH 
transactions  are  entered.  The  cash  book  is  really  the  cash  transactions 
of  the  journal  set  oflf  in  a  special  place.  In  this  way  the  general  journal 
is  relieved  of  the  numerous  cash  transactions.  To  separate  the  cash  trans- 
actions from  the  general  journal  and  set  them  apart  in  a  book  by  them- 
selves has  several  advantages. 

IMPORTANT  ADVANTAGES  OF  USING  CASH  JOURNAL 

There  are  four  outstanding  advantages  of  using  the  cash  journal  which 
are  as  follows: 

1.  Time  Is  Saved  in  Posting.  Instead  of  having  to  post,  item  by  item,  all  cash 
receipts  and  all  cash  disbursements  from  the  journal  to  the  cash  account  in 
the  ledger,  totals  can  be  posted  from  the  cash  book  at  the  end  of  the  period. 

2.  Less  Likelihood  of  Errors.  The  cash  book  will  show  a  balance  of  cash,  which 
should  agree  with  the  actual  balance  on  hand. 

3.  Amount  of  Cash  on  Hand  Quickly  Determined.  The  manager  of  the  business 
will  know  what  the  cash  amounts  to  by  quick  reference  to  the  cash  book. 

4.  Clerical  Work  Can  Be  Divided.  One  person  can  work  on  the  cash  journal  and 
another  on  the  general  journal.  With  this  division  of  labor  among  several 
individuals,  greater  accuracy  will  be  obtained.  The  fact  that  several  persons 
are  working  independently  of  each  other  provides  a  check  on  the  accuracy  of 
the  records. 

Briefly  stated,  then,  the  cash  book  saves  time,  assures  greater  accuracy, 
and  helps  to  safeguard  the  cash. 

To  what  extent  the  cash  journal  saves  time  for  the  accountant  can  very 
easily  be  shown  by  means  of  an  illustration.  Assume  that  your  journal  for 
January,  1922,  contains  altogether  twenty-nine  transactions,  thirteen  of 
which  were  for  cash  received.  We  will  also  assume  that  these  cash  receipts 
were  entered  in  your  general  journal,  as  shov/n  in  Figure  1. 


JOURNAL 


DATE 

L.F. 

EXPLANATION 

DEBITS 

CREDITS 

1922 

Jan. 

3 

Cash 

Sales 
Total  cash  sales  for  day 

29 

10 

29 

10 

3 

Cash 

Smith  &  Block 
Their  check  on  account 

45 

00 

45 

00 

6 

Cash 

Baldwin  Bros. 
Their  check  on  account 

50 

00 

50 

00 

6 

Cash 

Income 
Sale  of  old  boxes 

22 

00 

22 

00 

9 

Cash 

Notes  Receivable 
Hunter,  Fischer  &  Co.  redeem  their  note 

100 

00 

100 

00 

9 

Cash 

Sales 
Total  cash  sales  for  day 

60 

90 

60 

90 

13 

Cash 

Simon  Archer 
His  check  on  account 

50 

00 

50 

00 

16 

Cash 

Sales 
Total  cash  sales  for  day 

250 

55 

250 

55 

20 

Cash 

Notes  Payable 
Borrowed  from  First  National  on  our  note  for  30  days 

500 

00 

500 

00 

21 

Cash 

Sales 
Total  cash  sales  for  day 

174 

45 

174 

45 

23 

Cash 

R.  W.  Gale 
Currency  on  account 

75 

00 

75 

00 

25 

Cash 

James  Bros. 
Their  check  in  full  of  account 

80 

00 

80 

00 

31 

Cash 

Sales 
Total  cash  sales  for  day 

200 

00 

200 

00 

Cash  Receipts  Entered  in  General  Journal 

Figure  1.    You  understand,  of  course,  that  only  the  cash  receipts  are  shown  here.    All 

other  items,  cash  payments  and  noncash  items  are  purposely  left  out  to  save  space. 

The  important  thing  to  note  is  the  repetition  of  the  word  "Cash"  and  the  entering  of 

the  amount  twice.    This  all  takes  time. 


Assignment  7,  Page  2 


Same  Transactions  in  Condensed  Form.  Since  every  entry  is  a  debit 
to  the  Cash  Account,  what  would  be  easier  than  to  say  that  the  TOTAL  of 
all  cash  receipts  is  a  debit  to  the  Cash  Account?  Each  item  is,  of  course, 
a  credit  to  some  other  account. 

It  would  be  possible,  therefore,  to  condense  considerably  the  cash  re- 
ceipts of  Figure  1.  Thirteen  debits  could  be  left  out  and  one  total  debit 
take  their  place,  as  shown  in  Figure  2. 

JOURNAL 


DATE 

L.F. 

PLANATION 

DEBITS 

CREDITS 

1922 

— 

Jan. 

Total  Cash  Received-- 

1,637 

00 

3 

SaleB--Total  for  day 

29 

10 

3 

Smith  &  Block--Their  check  on  account 

45 

00 

6 

Baldwin  Bros. --Their  check  on  account 

50 

00 

6 

Income--Sale  of  old  boxes 

22 

00 

9 

Notes  Receivable--Hunter  Fisher  &  Co.  redeem  note 

100 

00 

9 

Sales--Total  for  day 

60 

90 

13 

Simon  Archer--His  check  on  account 

50 

00 

16 

Sales--Total  for  day 

250 

55 

20 

Notes  Payable--Borrow  of  First  National  Bank 
30  days 

500 

00 

21 

Sales--Total  for  day 

174 

45 

23 

R.  W.  Gale--Currency  on  account 

75 

00 

25 

James  Bros. --Their  check  in  full  of  account 

80 

00 

31 

Sales--Total  for  day 

200 

00 

Cash  Receipts  Condensed  in  General  Journal 

Figure  2.  Here  you  have  only  one  debit  to  the  Cash  Account,  $1,637.00,  instead  of 
thirteen,  as  in  Figure  1.  Thus,  you  see,  both  time  and  space  are  saved.  The  one  total 
debit  exactly  offsets  the  numerous  detail  credits.  Figure  3  will  help  you  to  under- 
stand more  easily  how  the  standard  cash  book  should  be  set  up,  and  how  it  is  posted. 

Standard  Cash  Book  With  Receipts  Properly  Entered.  Now  that  the 
transactions  have  been  condensed  it  will  be  an  easy  matter  to  enter  them 
in  the  standard  cash  book  as  presented  in  Figure  3. 

Cash  Disbursements  Recorded  in  Cash  Journal,  Ri^ht-Hand  Page.  Thus 
far  we  have  set  up  the  cash  receipts  in  the  cash  book,  on  the  left-hand  page. 
Now  we  shall  give  you  a  list  of  typical  cash  disbursements  for  January, 
1922,  and  shall  ask  you  to  enter  them  properly  in  Figure  4. 


Assiirnment  7,  Page  8 


CASH   JOURNAL    (left  page) 


MONEY 

DATE 

L.F. 

ACCOUNT  CREDITED 

EXPLANATION 

DETAIL 

TOTAL 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

1922 

Jan. 

1 

Balance 

Dec.  31,  1921 

1,500 

00 

3 

Sales 

Total  for  day 

29 

10 

3 

Smith  &  Block 

Their  check  on  account 

45 

00 

6 

Baldwin  Bros. 

Their  check  on  account 

50 

00 

6 

Income 

Sale  on  old  boxes 

22 

00 

9 

Notes  receivable 

Hunter  Fisher  &  Co.  redeem  note 

100 

00 

9 

Sales 

Total  for  day 

60 

90 

13 

Simon  Archer 

His  check  on  account 

50 

00 

16 

Sales 

Total  for  day 

250 

55 

20 

Notes  Payable 

Borrow  of  First  National  Bank 
30  days 

500 

00 

21 

Sales 

Total  for  day 

174 

45 

23 

R.  W.  Gale 

Currency  on  account 

75 

00 

25 

Notes  Receivable 

James  Bros.'  check,  in  full  pay- 
ment of  note 

80 

00 

31 
31 

Sales 

Total  debit  to 

Total  for  day 
Cash  Account 

200 

00 

1,637 

00 

3,137 

00 

The  Simple  Cash  Jouknal  (left  page) 

Figure  3.  Note  how  every  transaction  is  entered  in  this  cash  book.  One  line  is  given 
to  each  item.  These  items  are  added,  and  the  total  is  posted  as  a  debit  to  the  Cash 
Account.  Each  of  the  items  is  also  posted  separately  as  a  credit  to  the  account  named 
in  the  column  headed  "Accounts  Credited."  Note  the  similarity  between  this  caah 
journal  and  the  condensed  form  of  the  jounial  in  Figure  2. 

The  following  cash  payments  were  made  during  January : 

Jan.    4  Purchases  Merchandise „ $700.15 

B  Pays  rent  for  January 40.00 

10  Buys  office  desk. _ 75.00 

11  Pays   clerk's   salary 15.00 

26  Sends  check  to  General  Supply  Co 100.00 

27  Purchases  fresh  vegetables  from  wagon 11.85 

28  Sends  check  to  Alpha  Grocery  Co.„ 30.00 

31  Buys  horse  and  wagon 150.00 

31  Sends  check  to  Michigan  Fruit  Co 100.00 

31  Sends  check  to  Western  Produce  Co 120.00 

31  Sends  check  to  Wilson  &  Co 65.00 


Assignment  7,  Page  4 


CASH  JOURNAL  (right  page) 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

HONEY 
DETAIL 

TOTAL 

(7) 

(8) 

(9) 

(10) 

(11) 

(12) 

The  Cash  Journal  (right  page) 

Figure  4.  This  blank  form  is  for  your  own  use  and  practice.  Enter  each  of  the  cash 
disbiu'sements  shown  on  page  4.  After  you  have  made  the  entries,  determine  the 
balance  between  the  disbursements  side  and  the  receipts  side  of  the  cash  book.  If  you 
enter  the  disbursements  correctly,  you  will  find  that  the  balance  is  $1,740.00.  This 
work  is  for  your  practice  and  need  not  be  sent  in  to  the  University. 

Use  of  Columns  in  Cash  Book.  Each  column  in  the  cash  book  is  used 
for  a  specific  purpose,  as  illustrated  in  Figures  3  and  4.  It  is,  after  all,  a 
simple  matter  to  enter  transactions  properly  in  the  cash  book.  There  is 
nothing  difficult  about  it ;  only  remember  that  the  cash  book  is  really  noth- 
ing more  than  the  journal,  arranged  so  as  to  save  time  and  space. 


Assignment  7,  Page  5 


Note,  especially,  that  the  cash  book  in  no  way  alters  the  debit  and  credit 
analysis  of  transactions,  neither  does  it  change  in  any  way  the  accounts 
affected  by  the  transactions.  Think  of  each  side  of  the  cash  book  as  a 
separate  cash  journal.  Make  each  entry  in  the  cash  book  just  as  it  would 
be  made  in  the  journal,  omitting  the  unnecessai-y  words  and  figures.  Every 
cash  receipt  is  a  debit  to  cash  and  a  credit  to  some  other  account.  Every 
cash  disbursement  is  a  credit  to  cash  and  a  debit  to  some  other  account. 
This  twofold  effect  of  each  cash  book  entry  upon  the  accounts  is  obvious 
when  you  consider  how  the  cash  book  is  posted. 

Posting  Cash  Book.  The  total  cash  received  during  the  month  is  posted 
on  the  last  day  of  the  month  as  a  debit  to  the  Cash  Account.  The  total 
cash  disbursed  during  the  same  month  is  posted  as  a  credit  to  the  Cash 
Account.  Thus  only  two  postings  need  be  made  to  the  Cash  Account,  no 
matter  how  many  entries  the  cash  book  contains.  Obviously  the  larger 
the  business  the  greater  is  the  number  of  cash  items,  and  consequently 
the  gi'eater  is  the  saving  of  time  if  a  cash  book  is  used.  Posting  from  the 
cash  book  is  not  complete,  however,  when  these  totals  have  been  posted, 
because  those  two  entries  affect  only  the  Cash  Account. 

Every  item  must  also  be  posted  separately  to  the  other  account  which 
is  affected,  just  as  it  would  be  posted  from  the  journal.  This  posting  may 
be  done  every  day  or  less  frequently,  depending  on  the  number  of  items. 
On  the  receipts  side  of  the  cash  book  you  find  a  column  "Account  Credited." 
In  this  column  is  written  the  name  of  the  account  to  which  a  credit  must 
be  posted  for  each  item.  Instead  of  having  one  account  for  all  customers, 
headed  "Accounts  Receivable,"  we  shall  from  now  on  set  up  a  separate 
account  for  each  customer.  For  the  time  being,  then,  "Accounts  Receiv- 
able" account  will  disappear  from  the  ledger,  and  a  number  of  separate 
accounts  with  customers  will  take  its  place, 

"Account  Debited"  Column.  On  the  disbursements  side  of  the  cash 
book  you  find  a  column,  "Account  Debited."  In  this  column  are  written 
the  names  of  the  individual  accounts  in  the  ledger  to  which  the  several 
items  must  be  posted  as  debits.  For  example,  the  item  of  January  4  must 
be  posted  as  a  debit  to  the  Purchase  Account  and  the  item  of  January  5 
as  a  debit  to  the  Expense  Account.  The  item  for  the  26th  is  posted  as  a 
debit  to  the  General  Supply  Company  Account.  This  account  is  a  per- 
sonal account  and  is  for  one  particular  creditor.  It  is  one  of  the  Accounts 
Payable  accounts.  For  the  present,  then,  we  shall  not  use  an  Accounts 
Payable  Account  in  which  all  creditors'  items  are  posted,  but  each  creditor 
will  have  a  separate  account. 

Use  of  Folio  Column.  In  order  to  make  the  cross  reference  most  useful, 
the  page  number  recorded  in  the  folio  column  of  the  ledger  is  preceded  by 
a  letter  to  indicate  the  book  of  original  entry  from  which  it  is  posted.  Thus 
"J2"  means  that  the  item,  was  posted  from  page  2  of  the  journal.  Like- 
wise, "C3"  would  mean  that  the  item  was  posted  from  page  3  of  the  cash 
book. 

How  Cash  Book  Saves  Time.  By  posting  the  total  cash  receipts  as  a 
debit  to  the  Cash  Account,  and  the  total  cash  disbursements  as  a  credit 
to  the  Cash  Account,  we  save  twenty-two  separate  postings  out  of  a  pos- 

Assignment  7,  Page  6 


sible  twenty-four.  If  these  transactions  had  been  posted  from  the  general 
journal  instead  of  from  the  cash  book,  each  item  would  have  had  to  be 
posted  separately  to  the  Cash  Account.    Now  only  two  totals  are  posted. 

You  can  easily  determine  how  many  separate  postings  would  be  saved 
if  we  had  1,000  separate  cash  receipts  and  1,000  cash  disbursements.  By 
using  the  cash  book  we  would  save  1,998  separate  postings  to  the  Cash 
Account.  The  larger  the  volume  of  business,  the  greater,  therefore,  is  the 
advantage  of  using  a  cash  book. 

Is  Cash  Account  Necessary  When  Cash  Book  Is  Used?  Many  account- 
ants prefer  to  abandon  the  Cash  Account  entirely  when  a  cash  book  is 
used.  The  cash  book  then  serves  as  the  Cash  Account,  since  the  balance 
of  the  cash  book  is  the  same  as  would  appear  in  the  Cash  Account.  Some 
accountants  object  to  this  method,  however,  on  the  grounds  that  the  ledger 
is  not  self-balancing  under  this  arrangement. 

Suppose  that  no  Cash  Account  is  used,  then  in  taking  the  trial  balance, 
it  would  be  necessary  to  go  out  of  the  ledger  for  the  cash  balance.  The 
cash  book  would,  of  course,  have  the  correct  balance  for  the  cash  item  in 
the  trial  balance,  but  the  cash  book  is  a  book  of  original  entry — a  journal — 
and  it  is  best  to  confine  the  trial  balance  to  the  ledger.  For  this  reason,  it 
is  advised  by  most  authorities  on  accounting  to  set  up  a  Cash  Account  in 
the  ledger,  and  thus  keep  the  ledger  self-balancing. 

When  Is  Cash  Book  Balanced?  The  cash  book  should  be  balanced  at  the 
close  of  each  day's  business.  This  daily  balance  may  be  inserted  in  pencil 
in  the  explanation  column  on  the  debit  side.  Thus,  the  cash  balance  for 
each  day  can  be  verified  by  comparing  it  with  the  cash  balance  on  the  check 
stubs,  or  with  the  cash  in  the  cash  register,  or  the  sum  of  the  two.  If  any 
errors  are  made  in  recording  cash  book  items,  they  can  be  discovered  and 
corrected  by  this  daily  check. 

The  cash  book  is  balanced  in  ink  and  closed  only  at  the  time  of  posting 
totals.  This  posting  is  usually  made  at  the  end  of  the  month,  or  oftener 
if  the  needs  of  the  business  require  it.  At  this  time  the  cash  balance  is 
set  up  below  the  double  ruling,  ready  for  the  next  month's  entries.  The 
balance  on  hand  the  first  of  the  month  is  entered  in  the  total  column,  so 
that  it  will  be  kept  separate  from  the  cash  receipts,  which  are  entered  in 
the  "money  detail"  column,  sometimes  called  the  "net  cash"  column.  The 
total  of  the  money  detail  column  is  the  amount  to  be  posted,  and  the  bal- 
ance at  the  beginning  of  the  month  should  not  be  included  in  this  amount, 
because  the  balance  is  already  in  the  Cash  Account. 

Advantages  of  Separate  Cash  Books  for  Receipts  and  Disbursements. 

The  simple  cash  book  with  all  receipts  recorded  on  the  left-hand  page,  and 
all  disbursements  on  the  right-hand  page,  answers  the  requirements  of  a 
small  business.  But  in  a  larger  business  the  volume  of  cash  transactions 
is  much  greater.  In  most  concerns  the  cash  receipts  usually  outnumber 
the  disbursements. 

For  these  reasons  the  cash  book  is  often  divided  into  two  separate 
books,  one  for  receipts  and  the  other  for  disbursements.  This  arrange- 
ment makes  possible  an  even  greater  economy  in  at  least  two  respects : 

Assignment  7,  Page  7 


First:  Several  employes  can  work  on  the  cash  books  at  the  same  time.  This  is 
desii-able,  not  only  because  a  larger  volume  of  work  can  be  accomplished,  but 
also  because  gi'eater  accuracy  can  be  obtained,  since  each  person,  in  handling 
only  one  type  of  transaction,  becomes  more  proficient  and  accurate. 

Second:  Another  advantage  in  having  separate  books  results  when  they  are 
balanced  at  the  end  of  the  period.  The  receipts  usually  outnumber  the  dis- 
bursements. When  the  receipts  and  disbursements  ai'e  recorded  on  opposite 
pages  in  the  same  book,  the  receipts  side  will  be  filled  up  much  more  quickly 
than  the  disbursements  side.  Thus,  when  the  two  sides  are  balanced,  a  con- 
siderable number  of  right-hand  pages  will  be  wasted.  This  waste  can  be 
eliminated  by  using  a  separate  book  for  cash  receipts. 

In  very  large  businesses  and  in  concerns  with  numerous  departments, 
it  is  frequently  necessary  to  use  several  cash  receipts  books  and  several 
cash  disbursements  books.    In  such  cases  still  greater  economy  results. 

Function  of  General  Journal  When  Cash  Book  Is  Used.  Since  cash 
transactions  are  entered  in  the  cash  journal  or  journals,  it  is  evident  that 
the  usefulness  of  the  general  journal  becomes  somewhat  restricted.  It 
becomes  the  book  of  original  entry  for  only  such  transactions  as  occur  in- 
frequently. In  all  cases  where  a  given  kind  of  transaction  recurs  often 
enough  to  warrant  it,  special  journals  are  very  useful,  but  there  remains 
the  necessity  of  journalizing  in  the  usual  way  many  transactions  thruout 
an  accounting  period. 

We  have  seen  that  the  general  journal  is  used  in  making  closing  entries 
(Assignment  6).  It  is  used  also  in  cases  where  notes  are  received  or  given 
on  account,  and  often  in  case  of  adjustments  with  customers  and  creditors. 
It  is  not  used  for  entering  sales  and  purchases,  as  these  transactions  occur 
frequently ;  special  journals  are  provided  for  them,  as  will  be  explained  in 
the  next  assignment. 

In  this  connection  it  should  be  noted  also,  that  whenever  a  business 
begins  operations,  it  is  desirable  that  the  entire  investment,  including 
cash,  be  set  up  in  the  journal  so  that  the  record  will  be  complete  in  one 
place. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

Before  taking  up  the  problems  you  will  want  to  assure  yourself  that 
you  have  mastered  the  essential  points  of  this  assignment.  We  shall 
restate  them  for  your  convenience. 

First — Cash  transactions  occur  so  frequently  in  a  business  that  it  is 
advisable  to  record  them  in  a  special  book  called  the  "cash  jour- 
nal."   In  this  way  the  cash  is  more  carefully  safeguarded. 

Second — The  Cash  journal  has  at  least  four  advantages,  as  shown  in 
the  illustrations. 

1.  Time  is  saved  by  posting  totals. 

2.  There  is  less  likelihood  of  errors. 

3.  The  cash  balance  can  be  determined  daily. 

4.  The  clerical  work  can  be  distributed  among  several  clerks. 

Third — The  cash  journal  is  nothing  more  than  a  part  of  the  general 
journal,  set  up  in  a  condensed  form.  The  left-hand  page  is  for 
receipts,  and  the  right-hand  page  for  disbursements.    The  forms 

Assignment  7,  Page  8 


shown  in  this  assignment  are  of  the  simplest  design.  These  sim- 
ple forms  will  be  expanded  in  later  assignments  into  the  cash 
books  with  numerous  columns,  such  as  are  used  in  large  busi- 
nesses. 

Fourth — The  cash  journal  is  posted  thus: 

1.  Cash  receipts  and  disbursements  are  posted  in  total  to  the 
Cash  Account  at  the  end  of  the  period. 

2.  Each  cash  receipt  is  credited  and  each  cash  disbursement  is 
debited,  item  by  item,  to  the  proper  account. 

Fifth— Separate  cash  books  save  time  and  space  in  businesses  with 
numerous  departments. 


Promotion  comes  from  exceptional  work. 
— Andrew  Carnegie. 


Assigrnment  7,  Page  9 


PROBLEMS  TO   BE  SOLVED  WITH  ASSIGNMENT   7 

The  problems  give  you  an  opportunity  to  apply  the  principles  of  the 
cash  book.  Prepare  the  solutions  to  the  problems  while  the  discussion  of 
the  assignment  is  still  fresh  in  your  mind.  That  is  always  the  best  way  to 
clinch  a  fundamental  principle. 

1.  On  March  10,  1922,  you  purchase  from  the  National  Silk  Company 
an  invoice  of  silks  amounting  to  $3,124.00.  You  call  their  atten- 
tion to  an  error  they  made  in  the  pricing  of  one  item  on  the  invoice. 
Instead  of  listing  it  as  $34.00,  the  invoice  shows  it  as  $43.00.  On 
March  14,  the  company  sends  you  a  credit  memorandum  allowing 
you  credit  for  the  difference. 

One  piece  of  silk,  containing  75  yards  priced  at  $2.00  per  yard,  is  re- 
turned as  not  a  part  of  the  original  order,  and  you  are  given  credit  on 
March  17. 

On  April  15,  you  make  settlement  by  giving  a  30-day  6%  note  for 
$1,200.00  and  a  check  for  both  the  balance  due  and  the  interest  on  the  note 
for  30  days. 

(a)  Set  up  journal  entries  for  each  step  of  the  transaction,  assuming 
that  you  have  only  one  book  of  original  entry,  the  general  jour- 
nal.   Number  your  journal  entries  1,  2,  3,  etc. 

(b)  Now  assume  that  you  have  two  books  of  original  entry,  a  general 
journal  and  a  cash  book.  Which  of  these  transactions  will  be 
entered  in  the  general  journal  and  which  in  the  cash  book?  In 
giving  your  answer  refer  to  the  journal  entries  by  number. 

2.  Mr.  Crane  opens  a  retail  clothing  store.  He  decides  to  use  a  cash 
book  and  a  general  journal.  On  January  2,  1922,  when  he  began 
business,  he  had  the  following  assets:  Cash,  $2,500.00;  Auto  Truck, 
$900.00;  Furniture  and  Fixtures,  $800.00;  Notes  Receivable, 
$200.00.  How  would  this  original  investment  be  entered  on  the 
books  ? 

3.  J.  Evans,  who  buys  and  sells  products,  began  his  business  on  De- 
cember 1,  1921.  You  are  to  keep  his  books  for  him  in  the  opera- 
tion of  the  business.  Mr.  Evans  asks  you  to  use  a  cash  book 
for  all  cash  transactions  and  a  general  journal  for  all  other  trans- 
actions. He  also  asks  that  separate  personal  accounts  be  kept 
in  the  ledger  along  with  the  other  necessary  accounts. 

Enter  the  following  transactions  for  December,  1921,  in  the  proper 
books  of  original  entry.  Send  in  the  cash  book  properly  balanced  and 
closed,  and  the  general  journal  entries  for  noncash  transactions.  His  orig- 
inal investment  includes  $1,000.00  cash,  store  fixtures  valued  at  $400.00, 
and  a  promissory  note  for  $500.00  signed  -by  J.  Wall,  due  on  December  16, 
1921,  without  interest. 

Dec.     1  Pays  $100.00  rent. 

1  Purchases  from  M.  Moll  on  account,  merchandise  valued  at  $500.00. 

2  Sells  to  J.  A.  Abbey  on  account,  mei'chandise  valued  at  $175.00. 
2  Buys  from  L.  M.  Call  on  account,  merchandise  valued  at  $150.00. 

Assignment  7,  Page  10 


2     Gives  his  promissory  note  for  $500.00,  payable  in  20  days,  to  M.  Moll  in 
full  pasrment  of  merchandise  purchased  on  December  1. 

2  Buys  postage  stamps  for  $10.00  cash. 

3  Sells  to  C.  L.  Wilson  on  account,  merchandise  valued  at  $250.75. 

5  Purchases  merchandise  for  cash,  $110.17. 

6  Purchases  merchandise  for  cash,  $65.00. 

7  Sells  merchandise  for  cash,  to  L.  E.  Emery,  $35.70. 

7    Receives  C.  L.  Wilson's  30-day  note  for  $200.00  in  part  payment  of  his 
account  on  December  3,  and  the  balance  in  cash. 
(This  requires  two  entries,  one  in  the  journal  and  one  in  the  cash  book.) 

10     Purchases  on  account  from  B.  E.  Carr,  merchandise  valued  at  $172.38. 

10    Issues  a  check  to  the  Illinois  Central  Railroad  Company  for  $6.50  in  pay- 
ment of  freight  on  the  above  merchandise.     (Debit  Purchases.) 

12  Returns,  as  unsatisfactory,  part  of  the  merchandise  purchased  on  Decem- 
ber 10  from  B.  E.  Carr,  for  which  the  latter  credits  him  with  $18.00. 

13  Sells  merchandise  for  cash,  $254.38. 

16    Receives  check  from  J.  A.  Abbey  for  $175.00  in  full  payment  of  latter's 
purchase  on  December  2. 

16  Receives  cash  from  J.  Wall,  $500.00,  in  payment  of  note  due  to-day. 

17  Sells  merchandise  for  cash,  $122.15. 

20     Gives  a  15-day  note  to  B.  E.  Carr  in  payment  of  balance  owing  on  pur- 
chases of  December  10. 

22  Pays  cash  to  M.  Moll,  $500.00,  for  note  due  to-day. 

23  Buys  merchandise  for  cash,  $41.00. 

29  Sells  to  L.  E.  Emery  on  account,  merchandise  valued  at  $98.47. 

30  L.  E.  Emery  returns,  as  unsatisfactory,  merchandise  he  purchased  on 
December  29,  for  which  Mr.  Evans  allows  him  $7.29  credit. 

30    Gives  F.  M.  Nichols,  clerk,  check  for  $150.00  for  salary  for  month  of 

December. 
30     Gives  check  to  S.  T.  Allen  in  payment  of  bill  for  advertising,  $6.00. 
30     Sells  merchandise  for  $254.00  cash. 

Note:     The  amount  of  merchandise  on  hand  December  31  is  $381.78. 

Post  these  journal  and  cash  book  entries  to  the  ledger  accounts. 
Send  in  the  ledger  accounts. 

Prepare  and  send  in  a  trial  balance  of  balances  of  December  31, 
1921,  before  closing. 


Assignment  7,  Page  11 


Higher  Accountancy 

a  I  I  a 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  8 

MERCHANDISE  RECORDS 


I  CANNOT  SEE  how  a  young  man  can  better  fit  him- 
self for  an  executive  position  than  by  a  study  of  aC' 
counting. 

Certainly,  the  ability  to  analyze  statements,  to  understand 
figures  and  reports,  is  a  decided  advantage  to  men  in 
supervisory  positions.  The  man  who  has  had  this  train- 
ing and  can  see  back  of  the  figures,  certainly  has  a  de- 
cided advantage  over  the  man  who  has  not  had  this 
training. 

A  VON  SCHLEGELL 

Vice  President,  Hup>p  Motor  Car  Corporation 


LaSalie  Extension  University 

Chicago 


NHA-6 
<n-l82) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


MERCHANDISE  RECORDS 

PURCHASE  JOURNAL— SALES  JOURNAL 

You  are  now  familiar  with  the  use  of  the  journal.  You  understand 
also  that  it  has  become  desirable  in  modern  accounting  to  have  special 
journals,  where  there  are  numerous  transactions  of  a  similar  nature,  such 
as  cash  receipts  and  cash  disbursements. 

In  this  assignment  we  shall  continue  the  discussion  of  special  journals 
and  show  the  effectiveness  of  their  use  in  recording  and  summarizing 
purchase  and  sales  transactions. 

Before  illustrating  and  describing  the  purchase  journal  and  the  sales 
journal,  it  will  be  interesting  to  mention  briefly  some  of  the  business 
practices  observed  in  the  purchasing  department  and  in  the  sales  depart- 
ment of  a  modern  commercial  organization. 

Handling  of  Purchases.  Purchases  of  merchandise  or  of  raw  material 
usually  follow  a  more  or  less  fixed  routine.  This  is  true  especially  in 
larger  concerns,  where  authority  is  distributed  to  various  departments. 
As  shown  in  Figure  1,  every  purchase  goes  thru  a  complete  cycle  before 
it  is  recorded  on  the  books. 

Take  for  example  the  purchase  routine  of  a  manufacturing  plant.  It 
starts  in  the  storeroom.  The  stores  clerk  fills  out  a  purchase  requisition 
for  material  that  is  running  low  in  the  storeroom.  This  operation  is 
designated  "1"  in  Figure  1.  This  requisition  is  merely  a  request  for  more 
goods.  It  shows  the  grade  of  goods  needed,  the  amount,  and  the  delivery 
date.    This  requisition  is  then  sent  to  the  purchasing  department. 

On  receipt  of  the  requisition  the  purchasing  department  checks  it 
with  the  last  previous  order  so  as  to  determine  wisely  the  grade  of  goods 
to  be  ordered,  the  amount,  the  price,  and  from  whom  to  buy.  Finally  the 
purchasing  department  issues  a  purchase  order  shown  as  "2"  in  Figure  1. 
One  copy  goes  to  the  company  from  whom  the  goods  are  to  be  purchased, 
another  copy  is  filed  in  the  purchasing  department,  and  a  third  goes  to  the 
receiving  clerk.    This  copy  very  often  has  the  quantities  omitted. 

The  order  is  filled.  The  goods  arrive  as  shown  by  "3"  in  Figure  1  and 
are  checked  over  by  the  receiving  clerk  against  the  shipping  ticket.  He 
records  on  the  purchase  order  the  quantities  of  material  received,  and 
returns  the  purchase  order,  as  a  sort  of  report,  to  the  purchasing  depart- 
ment.   This  operation  is  indicated  by  "5." 

In  the  meantime  the  purchasing  department  has  received  a  bill,  called 
the  "purchase  invoice."  ("4"  in  Figure  1.)  This  invoice  is  checked  with 
the  original  purchase  order  and  with  the  receiving  clerk's  report  on  what 
was  received.  If  necessary,  then  corrections  are  made.  Finally  the 
invoice  is  0.  K'd  and  sent  to  the  accounting  department  to  be  recorded, 


or  a  posting  ticket  is  made  out  and  sent,  in  which  case  the  invoice  is  kept 
in  the  purchasing  department.  This  step  is  shown  by  "6."  In  Figure  2 
you  have  a  reproduction  of  invoice,  together  with  the  requisition  and 
order. 


Accounting 

5 


The  Puechase  Cycle 

Figure  1.     Start  in  the  storeroom  and  follow  the  arrowed  line.     It  represents   the 

routine  of  a  purchase  before  it  is  recorded  on  the  books  by  the  accounting  department. 

The  numbers  will  help  you  to  interpret  the  chart,  as  explained  in  the  discussion. 

How  Purchases  Are  Recorded.  The  work  of  the  accountant  begins 
where  the  purchase  cycle  stops,  i.e.,  with  the  O.K'd  invoices  or  posting 
tickets.  It  is  from  these  invoices  or  tickets  that  the  accountant  secures 
the  information  that  he  records  on  the  books. 

If  the  purchase  is  for  cash,  he  enters  it  in  the  cash  book  along  with    ^ 
the  other  cash  disbursements.  fl 

If  the  purchase  is  made  on  account  it  may  be  recorded  in  the  general 
journal.     Whfn,  however,  these  purchases  become  numerous,  too  much 


Assigr)i»i>7it  8,  Page  2 


time  is  consumed  in  setting  up  each  transaction  in  the  general  journal.  A 
shorter  way  is  provided.  All  purchases  on  account  are  recorded  m  a 
separate  book,  called  the  purchase  journal. 


Purchase  Invoice  from  Outside 
Supply  House  to  the  Buyer. 

(Sometimes  requested  in  duplicate 
or  triplicate,  according  to  require- 
ments of  office  system.) 


Purchase  Order 
from  Purchas- 
ing Department 
to  Outside  Sup- 
ply House. 


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Purchase  Requisition 
(2  copies) 

1.  Original  sent  to  the  Purchasing 
Department. 

2.  Duplicate  kept  on  Storekeeper's 
file. 


Three  Essential  Forms  in  Purchase  Routine 

Figure  2.    These  forms  are  typical  of  forms  used  in  actual  business  practice  to  safe- 
guard the  purchase  routine  against  errors.     In  small  concerns  Ayhere  purchases  are 
not  numerous,  such  an  elaborate  method  is,  of  course,  not  required.     In  large  con- 
cerns, however,  they  are  absolutely  necessary. 


Assignment  8,  Page  8 


Advantages  of  Purchase  Journal.  The  chief  merit  of  the  special 
purchase  journal  is  that  it  saves  time,  in  the  same  way  that  a  cash  journal 
saves  time.  In  the  case  of  cash  receipts,  for  example,  every  transaction 
is  a  debit  to  the  Cash  Account.  The  cash  journal  does  away  with  all  these 
detail  charges  by  providing  a  total  at  the  end  of  the  month  for  all  cash 
received. 

The  situation  is  exactly  the  same  with  purchases.  If  purchases  are 
entered  in  the  general  journal,  each  transaction  must  be  charged  to  the 
Purchases  Account  separately.  Why  make  all  these  separate  charges? 
Why  not  record  all  purchases  together  in  a  special  journal,  and  then 
charge  the  total  at  the  end  of  the  month  to  the  Purchases  Account  ? 

That  the  purchase  journal  is  a  real  timesaver  is  convincingly  shown 
in  Figures  3,  4  and  5.  Notice  the  general  journal  entries  in  Figure  3  for 
several  purchases  on  account.  Every  one  is  a  debit  to  the  Purchases 
Account.  In  Figure  4  you  have  these  items  posted  to  the  ledger  accounts, 
and  you  note  that  the  Purchases  Account  contains  four  separate  items. 

JOURNAL 


DATE 


1922 
Jan. 


11 


17 


25 


31 


FOLIO 


EXPLANATION 


Purchases 

Northern  Milling  Co. 
Tenns,  n/30 


Purchases 

McKenzie  Produce  Co. 
Terms,  n/60 


Purchases 

Grocery  Sup^y  Co. 
Terms,  2/10--n/30 


Purchases 

Swift  &  Co. 
Terms,  2/15--n/45 


DEBITS  i  CREDITS 


100 


200 


300 


250 


00 


00 


00 


00 


100 


200 


300 


250 


00 


00 


00 


00 


Journal  Entries  for  Pukchases  on  Account. 

Figure  3.  Each  of  these  four  purchases  requires  three  lines  in  the  journal,  one  for 
the  debit,  one  for  the  credit  and  another  line  for  the  explanation.  The  same  amount 
must  be  written  twice.  This  would  consume  much  time  if  a  business  made  numerous 
purchases,  and  each  of  these  would  have  to  be  placed  in  the  journal  as  a  double  entry. 
Much  journal  space  would  be  used  up,  and  what  is  more,  the  journalizing  would  con- 
sume a  great  deal  of  time. 


Assignment  8,  Page  4 


When  these  journal  entries  are  posted  to  the  ledger,  the  accounts 
will  appear  as  in  Figure  4. 

LEDGER 

Purchases 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Pol. 

V 

CREDITS 

1922 
Jan. 

11 
17 
25 
31 

Northern  Milling  Co. 
McKenzie  Produce  Co. 
Grocery  Supply  Co. 
Swift,  &  Co. 

100 
200 
300 
250 

00 
00 
00 
00 

850 

00 

Northern  Milung  Co. 


1922 
fjan.  11  On  Account 

100  00 

McKenzie  Produce  Co. 

1922 

Jan.  17  On  Account 

200  00 

Grocery  Supply  Co. 

|1922| 
I    8Jan.|  251  On  Account 

Swift  &  Co. 


300100 


19221       I  I  I     I  I 

ijan.l  311  On  Account  I  |    I    250  00 


Ledger  Accounts  after  Posting 
Figure  4.    Notice  that  four  separate  postings  must  be  made  to  the  Purchases  Account. 
Suppose  that  instead  of  four  you  had  forty.   Much  time  would  be  consumed  in  posting, 
the  transactions  separately  to  the  Purchases  Account.    In  order  to  save  time  in  posting, 
accountants  have  devised  what  is  known  as  the  purchase  journal,  shown  in  Figure  5. 

Purchase  Journal.  The  shorter  method  is  given  in  Figures  5  and  6. 
The  purchase  journal  shown  in  Figure  5  is  in  reahty  the  journal  in  con- 
densed form.  The  difference  is  that  ONE  line  is  used  for  each  transaction 
instead  of  three,  and  the  amount  is  written  only  once. 

PURCHASE  JOURNAL 


DATE 
(1) 

L.P. 
(2) 

ACCOUNT  CREDITED 
(3) 

ADDRESS 
(4) 

TERMS 
(5) 

INVOICE 
(6)  No. 

PUR.  ACCT. 
(7)  Dr. 

1922 

Jan. 

■1 
It 

11 
17 
25 
31 

31 

Northern  Milling  Co. 
McKenzie  Produce  Co. 
Grocery  Supply  Co. 
Swift  &  Co. 

Total  purchases 

48-Walnut  St.. 
20  W.  Front  St. 
176  North  Ave. 
2000  S.  Western  Av. 

Dehit  purchases 

N/30 
N/60 

2/10-n/30 
2/15-n/45 

1 
2 
3 
4 

100.00 
200.00 
300.00 
250.00 

850.00 

The  Purchase  Joltinal. 
Figure  5.    The  facts  in  the  purchase  journal  are  kept  in  orderly  arrangement  by  rul- 
ings.   Seven  distinct  columns  are  provided — each  used  for  a  particular  purpose.   These 
are  for  the  most  part  self-explanatory. 


Assignment  8,  Page  5 


The  columns  in  the  purchase  journal  are  for  the  most  part  self- 
explanatory.  Rulings  help  to  keep  the  facts  in  orderly  arrangement. 
Every  column,  as  you  see,  is  used  for  a  particular  purpose.  Column  1,  as 
shown  in  Figure  5,  is  for  the  date  of  the  invoice.  Sometimes  another 
column  is  added  for  the  date  of  entry.  Column  2  is  for  the  page  in  the 
ledger  to  which  the  item  is  posted.  In  Column  3  is  written  the  name  of 
the  creditor  whose  account  is  to  be  credited. 

The  addresses,  in  column  4,  are  important,  because  a  certain  amount  of 
correspondence  is  always  carried  on  with  creditors.  Column  5  contains 
the  terms  of  the  purchase,  which  specify  when  the  bill  must  be  paid,  and 
the  per  cent  of  discount  allowed  for  prompt  payment.  "N/30"  means 
"net  30  days";  in  other  words,  the  full  amount  must  be  paid  within  30 
days.  "2/10— N/30"  means  "2  per  cent  in  10  days,  net  30  days" ;  that  is, 
deduct  2  per  cent  of  the  invoice  if  you  pay  within  10  days,  otherwise  the 
full  amount  is  due  within  30  days. 

Column  6  is  for  the  number  of  the  invoice.  The  purchaser  numbers 
his  purchase  invoices  consecutively,  so  that  he  can  refer  to  them  by 
number,  rather  than  by  date  or  name  of  creditor. 

Time  Saved  in  Posting.  When  the  transactions  are  posted  from  the 
purchase  journal.  Figure  5,  to  the  ledger,  the  accounts  will  appear  as 
shown  in  Figure  6. 

LEDGER 

Purchases 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Pol. 

S/ 

CREDITS 

1922 

Jan. 

31 

Total  Purchases 

850 

00 

Northern  Milling  Co. 


M( 

:Kenz 

1922 
Jan. 

IE  Prodi 

11 

UCE 

On  Account, 
Co. 

100  00 

C 

Jrocer 

1922 
Jan. 

Y  SuPPL 

17 
Y  C 

On  Account 
3o. 

200 

00 

St\ 

1922 
Jan. 

^IFT  &  C 

25 

0. 

On  Account 

300 

00 

1  1922 
Jan. 

31 

On  Account 

250 

00 

Ledger  Accounts  after  Posting  the  Purchase  Journal. 

Figure  6.    You  will  note  that  the  Purchases  Account  here  does  NOT  contain  FOUR 

SEPARATE  debit  items  as  it  did  in  Figure  4,  when  the  general  journal  was  used, 

BUT  only  ONE  amount,  which  is  the  TOTAL  purchases  for  the  month.    The  creditors' 

accounts  remain  the  same  as  in  Figure  4. 


Assignment  8,  Page  6 


The  purchase  journal  expresses  a  debit  to  the  Purchases  Account  and  a 
credit  to  the  several  personal  accounts  with  creditors.  The  credits  are 
made  currently,  and  item  by  item.  They  are  posted  at  short  intervals, 
usually  every  day  or  so,  in  order  that  the  personal  accounts  of  the  creditors 
will  be  kept  constantly  up  to  date. 

The  total  debit  will  be  posted  periodically,  say  at  the  end  of  every 
month,  before  a  trial  balance  is  taken.  Thus  much  time  is  saved  by 
posting  the  total  to  the  Purchases  Account. 

Double  Entry  Principle  Not  Violated.  At  first  glance  it  may  seem  that 
the  entries  in  the  purchase  journal  violate  the  double  entry  principle, 
namely,  that  for  every  debit  there  must  be  an  equal  offsetting  credit. 
When  you  consider,  however,  that  for  all  the  separate  credits  made  to  the 
creditors'  accounts,  one  total  debit  is  made  to  the  Purchases  Account,  you 
will  easily  see  that  the  books  are  kept  in  balance.  At  no  time,  however,  is 
the  ledger  really  in  complete  balance  until  the  total  of  the  purchase  jour- 
nal is  posted  to  the  Purchases  Account  at  the  end  of  the  period. 

Handling  Cash  Purchases.  A  cash  purchase  is  entered  in  the  cash 
book  disbursements  side.    The  account  debited  is  Purchases. 

A  concern  may,  however,  wish  to  know  how  much  business  they  do 
with  every  creditor.  To  secure  this  information  it  may  enter  all  purchases 
in  the  purchase  book,  both  the  purchases  for  cash  and  those  on  account. 
Even  tho  a  purchase  is  paid  for  immediately  in  cash,  it  is  treated  just  as 
if  it  were  on  account.  The  transaction  is  entered  in  the  purchase  book 
and  posted  to  the  Purchases  Account  in  the  debit  total.  It  is  posted 
separately,  as  a  credit,  to  the  creditor's  account. 

The  cash  payment  is  then  recorded  in  the  cash  book,  from  which  the 
item  is  posted  as  a  debit  to  the  creditor's  account,  instead  of  a  debit  to  the 
Purchases  Account.  In  this  way  a  concern  is  able  to  know  just  how  much 
business  it  has  had  with  each  of  its  creditors  during  the  period. 

Moreover,  many  firms  want  a  record  of  purchases  by  departments.  In 
such  a  case  they  enter  all  cash  purchases  in  the  purchase  journal.  Thus 
ALL  purchases  will  be  recorded  in  one  place,  and  it  will  be  easier  to  make 
an  analysis  of  purchases  by  departments.  Where  this  plan  is  followed,  a 
special  column  is  usually  provided  in  which  cash  purchases  may  be  entered 
and  totaled,  so  that  disbursements  for  cash  purchases  may  be  entered  in 
the  cash  journal  daily. 

Items  Not  Entered  in  Purchase  Journal.  Purchases  of  commodities  or 
supplies  on  account  to  be  used  in  the  business  itself  are  not  entered  in  the 
purchase  journal.  Usually  another  book  is  used  for  such  transactions, 
namely,  the  invoice  or  voucher  register,  which  will  be  presented  in  a  later 
assignment. 

Suppose  you  purchase  an  office  desk  on  account  for  $100.00.  The 
accounts  affected  are  the  Asset  Account,  Office  Furniture,  and  the  Liability 
Accounts  Payable.  The  Purchases  Account  is  not  affected.  For  this 
reason  this  transaction  would  not  be  entered  in  the  purchase  journal.  A 
general  journal  entry  must  be  made  thus: 

Office  Furniture  $100.00 

Northwestern  Desk  and  Supply  Co $100.00 

Assignunent  8,  Pag<»  7 


RECORDS  OF  SALES 
Selling:  Process  Analyzed.  After  goods  have  been  purchased,  and 
purchases  recorded  on  the  books,  the  next  important  operation  is  the 
selling  of  these  goods  at  a  profit.  Most  businesses  have  a  sales  depart- 
ment which  is  under  the  direct  supervision  of  a  sales  manager.  There  are 
so  many  different  types  of  business  that  it  would  be  impossible  to  describe 
here  a  sales  department  organization  that  would  fit  every  case.  Every 
business  develops  its  own  sales  organization  to  meet  its  own  needs  and 
the  needs  of  its  customers.  For  example,  in  the  latter  part  of  1921, 
Armour  &  Company  put  on  a  lively  contest  among  its  salesmen.  Within 
two  weeks  the  company  had  placed  on  its  books  the  names  of  6,142  new 
customers. 

Whatever  the  organization  may  be,  whether  it  be  large  or  small,  for 
a  wholesale  or  a  retail  business,  whether  goods  are  sold  thru  the  mails  or 
over  the  counter,  there  are  certain  definite  functions  in  sales  transactions 
that  demand  special  attention.    They  are  as  follows: 

1.  Getting  the  orders 

2.  Entering  the  orders  on  the  books 

3.  Filling  the  orders  and  delivering  the  goods 

Sales  Invoices  Give  Accounting  Information.  The  first  and  third  of 
these  functions  are  tied  up  with  business  management,  and  may  be  passed 
over  at  this  point.  Mention  should  be  made,  however,  of  the  sales  in- 
voices, as  illustrated  in  Figure  7.  These  invoices  have  come  to  be  more 
or  less  uniform,  depending  on  the  needs  of  a  particular  business.  All  sales 
invoices  should  be  drawn  up  in  such  a  form  as  to  include  all  the  necessary 
information,  such  as  date,  amount,  quality,  terms,  whether  for  cash  or 
credit,  when  to  be  paid,  when  to  be  delivered,  etc.  All  this  information 
should  be  included,  because  the  sales  invoices  must  furnish  to  the  ac- 
countant all  details  necessary  in  making  the  proper  record. 


No.  24  Chicago,  111.,  Jan.  12,  1921 

R.  T.  ALLEN 

PRODUCE 
210  S.  Laflin  St. 

Jackson  Bros. 

200  E.  31st  St.,  City. 

Terms.  2/10— n/ 30 


8  Barrels  Flour  @I10.00 


80.00 


80.00 


The  Sales  Invoice. 
Figure  7.  Note  the  number  in  the  upper  left  hand  corner.  This  number  is  a  great 
help  in  matters  of  reference  and  correspondence.  It  is  much  easier  and  more  definite 
to  speak  of  "your  bill  No.  24,"  than  to  try  to  identify  it  by  date  or  otherwise.  The 
advantage  of  using  a  number  as  an  identification  symbol  is  obvious,  especially  in  a 
business  like  Armour  &  Company  which  handles  thousands  of  such  invoices  every  year. 
This  number  will  also  be  recorded  in  the  sales  journal,  as  shown  in  Figure  10. 

Assignment  8,  Page  8 


These  sales  invoices,  if  for  sales  on  account,  are  passed  on  to  the 
department  for  analysis  and  O.K.  If  the  sale  is  to  a  new  customer,  his 
credit  standing  is  determined  from  information  collected  by  the  credit  de- 
partment. If  the  sale  happens  to  be  to  an  old  customer,  the  credit  depart- 
ment looks  up  his  standing,  to  see  whether  he  has  paid  past  bills  promptly, 
whether  credit  can  be  extended,  or  whether  the  old  bills  should  be  paid 
first. 

JOURNAL 


DATE 


1822 

Jan. 


12 


12 


18 


26 


30 


31 


FOLIO 


EXPLANATION 


Acme  Grocery  Co. 

Sales 
Terms,  n/30 


Max  Simpson 

Sales 
Terms,  n/30 


Jackson  Bros. 

Sales 
Terms,  2/10— n/30, 


Johnson  &  Co. 

Sales 
Terms,  2/10— n/20 


White  &  Smith 

Sales 
Terms,  2/10— n/20 


City  Club 
Sales 
Terms,  4/10— n/45 


William  Brown 

Sales 
Terms,  3/15— n/30 


DEBITS 


30  00 


75 


80 


200 


175 


310 


110 


00 


00 


00 


67 


00 


73 


CREDITS 


30 


75 


80 


200 


175 


310 


110 


00 


00 


00 


00 


67 


00 


73 


JouBNAL  Entries  fob  Sales  on  Account 

Figure  8.    If  we  had  only  one  book  of  original  entry,  we  would  have  to  enter  our  sales 
on  account  in  the  general  journal,  as  shown  here.    Each  sale  would  require  a  double 
entry  in  the  journal;  hence  the  operation  of  journalizing  itself  would  consume  consid- 
erable time. 

How  Sales  Are  Recorded.  As  was  explained  in  Assignment  7,  on  the 
cash  book,  all  cash  sales  are  brought  into  the  accounts  thru  the  cash 
book.  There  are  circumstances  which  will  make  it  desirable  to  record  cash 
sales  in  the  sales  journal,  but  this  will  be  taken  up  later.  It  is  obvious 
that  the  cash  received  from  sales  must  appear  in  the  cash  book,  either  in 


Assignment  8,  Page  9 


detail  or  in  total  amount.  It  is  therefore  the  sales  on  account  that  require 
additional  explanation.  As  in  the  case  of  purchases  on  account,  all  sales 
on  account  may  be  handled  in  one  of  two  ways,  either  thru  the  general 
journal  or  thru  a  special  sales  journal. 

As  long  as  a  business  continues  to  have  only  a  few  sales  on  account,  it 
might  just  as  well  enter  them  in  the  general  journal.  When,  however, 
these  transactions  become  numerous,  too  much  time  will  be  consumed  in 
journalizing  and  posting.  Think  of  the  time  that  Armour  &  Company 
would  have  wasted  if  they  had  entered  each  of  their  6,142  new  sales  for 
a  period  of  two  weeks  in  a  general  journal,  besides  all  the  sales  to  old 
customers.  Then  add  to  that  all  the  time  it  would  have  taken  to  post  each 
of  these  items  separately  to  a  Sales  Account. 

General  Journal  Consumes  Time.  To  show  how  the  general  journal 
entries  consume  time,  we  have  set  up  several  typical  transactions  in  the 
general  journal.  Figure  8,  and  posted  them  as  separate  items  to  the  ac- 
counts in  Figure  9. 

LEDGER 

Sales 


DATE 

ITEMS 

Fol. 

V 

DEBITS 

DATE 

ITEMS 

Pol. 

V 

CREDITS 

1922 

\ 

Jan. 

6 
12 
12 
18 
26 
30 
31 

Acme  Grocery  Co. 
Max  Simpson 
Jackson  Bros. 
Johnson  &  Co. 
White  &  Smith 
City  Club 
William  Brown 

30 
75 
80 
200 
175 
310 
110 

00 
00 
00 
00 
67 
00 
73 

Acme  Grocery  Co. 


1922 
Jan. 

6 

Sold  on  Account 

30 

00 

Max  Simpson 


1922 
Jan. 

12 

Sold  on  Account 

75 

00 

Jackson  Bros. 


1922 
Jan. 

12 

Sold  on  Account 

80 

00 

Johnson  &  Co. 


1922 
Jan. 

18 

Sold  on  Account 

200 

00 

{Accounts  continued  on  next  page) 


Assi^rnment  8,  Page  10 


White  &  Smith 

1922 
Jan. 

26 

Sold  on  Account 

175 

67 

City  Club 

1922 
Jan. 

30 

Sold  on  Account 

310 

00 

William 

Brown 

1922 
Jan. 

31 

Sold  on  Account 

110 

73 

Ledger  Accounts  after  Journal  Entries  Are  Posted. 

Figure  9.  Posting  also  takes  much  time.  Your  attention  is  directed  especially  to  the 
Sales  Account  with  its  seven  separate  credits.  These  seven  entries  would  be  avoided  if 
a  sales  journal  were  used,  as  shown  in  Figure  10.  Think  of  the  time  that  the  sales 
book  saves  annually  for  thousands  of  concerns.  One  of  the  large  department  stores  in 
Chicago  carries  close  to  200,000  customers'  accounts  on  its  books.  Assuming  that 
each  customer  makes  only  10  purchases  each  month,  you  can  readily  appreciate  how 
much  time  would  be  consumed  in  journalizing  all  such  transactions. 

Shorter  Method  of  Recording  Sales.  These  same  sales  can  be  entered 
in  a  shorter  and  more  economical  way  in  a  sales  journal,  which  is  often 
called  a  sales  book,  reproduced  in  Figure  10.  Only  one  line  is  used  for 
each  item,  and  the  amounts  are  written  only  once. 

SALES  JOURNAL 


DATE 

L.F. 

ACCOUNT  DEBITED 

ADDRESS 

TERMS 

SALES  NO. 

MDSE.  SALES 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

22 

23 

24 

25 

26 

27 

28 

The  Sales  Journal. 

Figure  10.  You  have  here  a  blank  sales  journal  for  your  own  practice.  Enter  in  it  the 
same  transactions  that  were  set  up  in  Figure  8,  and  you  will  see  at  once  that  a  sales 
journal  is  a  big  timesaver.  Then  close  the  sales  journal  as  we  have  closed  the  pur- 
chase journal.    If  you  have  made  the  entries  correctly,  you  will  have  a  total  of  $981.40. 

Posting  Sales  Journal.  After  you  have  entered  the  transactions  in  the 
sales  journal,  post  these  items  to  the  ledger  accounts  in  Figure  11.  The 
total  sales  is  posted  to  the  Sales  Account  as  a  credit,  and  each  of  the  items 
is  posted  to  a  personal  account  of  a  customer  as  a  debit.  (Do  not  send  this 
work  in  for  grading.) 


Assignment  8,  Page  11 


LEDGER 

Acme  Grocery  Co. 


DATS 

ITEMS 

Fol. 

^ 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1 

1 

1 

1 

Max  Simpson 


Jackson  Bros. 


Johnson  &  Co. 


White  &  Smith 


City  Chjb 


WiLUAM  Brown 


Sales 


Ledger  Accounts. 

Figure  11.    These  accounts  are  provided  for  your  practice.    Post  the  items  which  you 

have  entered  in  the  sales  journal,  Figure  10,  to  the  above  accounts.    Thus  by  posting 

the  items  yourself  you  will  learn  how  a  sales  journal  should  be  posted.    Often  you  can 

learn  an  operation  quickest  by  actually  doing  it. 

SELF-TEST  QUESTIONS 

1.  What  are  the  advantages  of  entering  the  items  in  the  sales  journal 
instead  of  the  general  journal? 

2.  Suppose  that  we  had  70  sales  on  account  for  January  instead  of  7, 
how  many  separate  postings  to  the  Sales  Account  would  we  have  saved? 


Assignment  8,  Page  12 


Transactions  Entered  in  Sales  Journal.  Only  sales  of  merchandise  on 
account  are  usually  entered  in  the  sales  journal.  It  may  be  desirable  also 
to  enter  the  cash  sales  in  the  sales  journal  for  the  sake  of  having  a 
complete  record  of  sales,  especially  when  sales  are  recorded  by  depart- 
ments. This  method,  however,  means  a  duplication  of  work,  since  cash 
sales  would  be  entered  in  both  the  cash  book  and  the  sales  book,  but  posted 
only  from  the  cash  book.  It  is  better,  therefore,  to  enter  only  sales  on 
account  in  the  sales  book,  and  all  cash  sales  in  the  cash  book.  Then  when 
the  sales  manager  wishes  a  complete  record  for  the  month,  a  recapitula- 
tion sheet  can  be  made  out,  showing  details. 

Flexibility  of  Accounting  Systems.  No  doubt  you  have  already  been 
impressed  with  the  fact  that  an  accounting  system  is  not  a  fixed  and 
rigid  thing.  It  permits  of  expansion  to  suit  the  needs  of  a  particular 
business  organization.  As  a  business  grows,  the  accounting  system  grows 
with  it. 

For  example,  it  has  been  explained  how  accounts  may  be  kept  by  the 
use  of  the  ledger  alone,  the  facts  being  classified  thru  direct  entry  into 
the  accounts.  Then  we  saw  the  advantage  of  expanding  the  system  to 
include  the  use  of  a  journal  as  a  book  of  original  entry  to  precede  the 
ledger.  These  two  books  would  have  sufficed  for  the  smaller  business, 
but  reasons  of  convenience  and  economy  demanded  further  expansion  of 
the  accounting  machinery. 

The  next  step  was  to  break  up  the  journal,  separating  it  into  distinct 
books  of  original  entry  for  such  classes  of  transactions  as  are  often 
repeated.  We  have  seen  the  cash  book,  sales  book,  and  purchase  book 
developed  in  this  way.  These  are  the  fundamental  books  of  most  ac- 
counting systems  for  trading  and  manufacturing  concerns,  but  for  the 
purpose  of  showing  how  an  accounting  system  can  be  extended  still 
farther,  let  us  explain  a  few  special  books  which  greatly  facilitate  the 
work  of  keeping  track  of  purchases  and  sales. 

How  Sales  Returns  May  Be  Recorded.  Sales  returns  may  be  recorded 
in  the  general  journal,  provided  the  number  of  such  transactions  is  small. 
Figure  12  shows  a  sales  returns  recorded  in  the  general  journal. 

JOURNAL 


DATE 

FOLIO 

EXPLANATION                  DEBITS 

CREDITS 

1922 

Jan. 

30 

Sales  Returns                               j  20 

Jackson  Bros.                            ■ 
Goods  of  invoice  24  returned  as  unsatisfactory 
tecause  of  error  in  weight 

00 

20 

00 

JouRN.\L  Entry  for  Sales  Returns. 

Figure  12.  This  entry  expresses  an  increase  in  the  Sales  Returns  Account  and  a  de- 
crease in  Jackson  Brothers'  (debtor)  account.  This  is  just  what  the  situation  means; 
here  is  one  more  return  of  goods,  i.e.,  an  increase  in  the  quantity  that  has  come  back; 
here  is  also  a  credit  (reduction)  to  the  debtor's  account,  for  Jackson  Brothers  cannot  be 
expected  to  pay  for  goods  which  they  have  returned. 


Assignment  8,  Page  13 


Sales  Returns  Book.  If  this  type  of  journal  entry  occurs  many  times 
in  the  course  of  a  year,  time  will  be  saved  by  a  sales  returns  book.  The 
general  style  of  such  a  book  would  be  much  the  same  as  that  of  other 
special  journals,  but  the  headings  of  the  columns  and  the  posting  from 
it  would  be  somewhat  different.  Figure  13  shows  a  typical  sales  returns 
book. 

SALES  RETURNS  BOOK 


DATE 
(1) 

PAGE 
(2) 

ACCOUNT  CREDITED 
(3) 

ADDRESS 
(4) 

INVOICE 
(5) 

CAUSE 
(6) 

AMOUNT 
(7) 

Jan 

31 

37 

Jackson  Bros . 
etc . 

City 

Total 

24 

D 

Error  in  weight 

etc . 
r.  Sales  returns 

20 

00 

Sales  Returns  Book. 

Figure  13.  Note  that  the  columns  which  are  most  essential  to  the  primary  purpose 
of  the  book  are  (3)  and  (7),  the  name  of  the  account  and  the  amount.  The  date  and 
address  are  shown  merely  for  convenience  of  reference;  page  and  invoice  numbers  are 
shown  as  a  matter  of  cross-indexing — of  "tying  together"  this  return  with  the  per- 
sonal account  and  with  the  original  sales  invoice.     In  the  column  headed  "Cause"  is 

given  the  reason  for  the  return. 

The  sales  returns  book  is  posted  by  debiting  the  total  to  the  Sales 
Returns  Account  at  the  end  of  the  period.  Each  item  is  posted  separately 
to  the  proper  customer's  account. 

Sales  Allowance  Book.  When  a  business  allows  credit  to  customers 
for  numerous  adjustments  without  requiring  the  return  of  the  goods,  it 
would  be  a  saving  of  time  to  record  all  these  transactons  in  a  sales  allow- 
ance book.  This  would  be  almost  a  duplicate  of  the  sales  returns  book. 
The  total  of  the  amount  column  would  be  posted  at  the  end  of  the  period 
to  a  Sales  Allowance  Account  instead  of  a  Sales  Returns  Account.  The  ac- 
counts credited  would  be  the  personal  accounts  of  the  debtors,  as  in  the 
sales  returns  book.  While  there  may  be  in  some  places  a  fairly  large 
number  of  returns,  it  is  not  very  likely  that  an  allowance  book  would  be 
needed.  In  such  cases,  allowances  and  returns  are  very  often  entered  in 
one  book,  called  the  sales  returns  and  allowances  book. 

Purpose  of  Credit  Memos.  When  customers  return  goods  for  any 
reason,  they  expect  to  receive  credit  for  them,  and  have  their  account 
(debt)  reduced  correspondingly. 

They  will  naturally  desire  some  notification  of  the  receipt  of  the 
returned  goods,  and  of  your  decision  to  allow  them  credit.  This  notice 
is  termed  a  credit  memorandum,  reproduced  in  Figure  14. 


Assignment  8,  Page  14 


No.  84                                                                                              Chicago,  111.,  Jan.  29,   1922 

R.  T.  ALLEN 

PRODUCE 
210  S.  Laflin  St. 

Jackson  Bros . 

200  E.  31st, ,  City. 
We  hare  Credited  your  account  as  follows: 

DATS 

EXPLANATION 

AMOUNT 

TOTAL 

Error  in  weight  on  Invoice  No.  24 

credit  allowed 

20.00 

20.00 

Credit  Memorandum 

Figure  14.    The  credit  memo  has  much  the  same  form  as  the  sales  invoice  of  Figure  7. 

Its  meaning,  however,  is  different.     Instead  of  saying,  "These  are  the  articles  you 

bought,''  as  does  the  sales  invoice,  the  credit  memorandum  says  in  effect:   "These  are 

the  articles  you  returned,  for  which  we  allow  you  credit." 

The  credit  memorandum  may  also  represent  a  sales  allowance.  It 
may  be  given  to  a  customer  who  finds  his  goods  damaged,  or  of  short 
weight,  or  of  inferior  quality,  when  the  customer  is  not  required  to  return 
the  goods,  but  receives  credit.  The  memorandum  slip  will  show  the 
amount  of  credit  allowed.  Usually  two  copies  are  made  out.  One  goes 
to  the  customer  and  the  other  is  retained  by  the  business  and  is  the  basis 
for  entries  on  the  books.  Some  of  the  larger  retail  houses  allow  the  cus- 
tomer to  cash  in  these  credit  slips,  if  he  so  desires.  Especially  is  this  true 
when  the  sale  was  originally  made  for  cash. 

Two  Types  of  Credit  Memos.  There  are  two  kinds  of  credit  memos, 
the  one  we  receive  and  the  one  we  give.  The  one  we  give  is  usually  called 
a  sales  credit  memo  and  the  one  we  receive  a  purchase  credit  memo. 

A  credit  memo  in  our  hands  is  a  purchase  credit  memo.  It  means 
that  we  have  returned  goods,  or  are  allowed  credit.  Our  creditor,  by 
means  of  the  memo,  grants  us  permission  to  deduct  the  amount  in  remit- 
ting for  our  purchase.  This  credit  memo  becomes  the  basis  for  an  entry 
on  our  books.  The  journal  entry  for  this  credit  memo  would  be  as  fol- 
lows : 

Harrison  Hunt    $35.00 

Purchase  Returned  $35.00 

Defective  wringers  from  their  invoice,  4,639,  our 
purchase  number,  40,895 

This,  we  see,  expresses  a  decrease  (debit)  to  a  creditor's  account,  and 
an  increase  to  Purchase  Returns  Account. 

Purchase  Returns  Journal.  If  there  are  many  purchase  returns,  a 
purchase  returns  book  may  be  brought  into  use.  Entries  are  made  in 
this  book  from  the  credit  memos  that  we  hold.     However,  since  there  are 

Assignment  8,  Page  15 


generally  fewer  creditors  than  debtors  on  our  books,  for  the  reason  that 
goods  are  bought  in  larger  lots  and  parceled  out  in  smaller  portions,  it 
is  unlikely  that  there  would  be  as  much  need  for  a  separate  purchase 
returns  book  as  for  a  sales  returns  book.  Most  business  houses,  there- 
fore, have  only  one  returns  book;  namely,  a  sales  returns  book. 

Special  Form  of  Sales  Book.  Before  summarizing  this  discussion  of 
merchandise  records,  it  will  be  interesting  to  note  some  modifications  of 
the  books  mentioned. 

Instead  of  writing  each  sale  in  a  sales  book,  many  concerns  make  a 
carbon  copy  of  each  sales  invoice.  These  copies  are  bound  in  a  loose-leaf 
binder,  and  arranged  in  a  strictly  numerical  order.  Thus  we  have,  with 
very  little  additional  effort  or  cost,  the  equivalent  of  a  sales  book. 

The  posting  to  the  personal  accounts  can  be  done  just  as  well  from 
the  carbon  copy  invoices  which  are  filed,  as  from  a  written  book,  since,  by 
the  use  of  the  adding  machine,  the  total  of  the  sales  can  be  easily  obtained. 
A  memorandum  is  made  of  this  total  on  the  last  invoice  for  the  period,  or 
on  a  special  recapitulation  sheet,  and  posted  from  this  invoice  or  sheet  to 
the  ledger,  just  as  the  total  from  the  usual  bound  sales  book. 

Special  Forms  of  Sales  Returns  Book.  With  our  credit  memos  the 
same  method  of  time  saving  may  be  carried  out;  the  sales  returns  book 
might  then  become  a  loose-leaf  volume  made  up  from  carbon  copies  of 
credit  memos.  The  posting  would  not  be  different  from  the  descriptions 
already  given. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

Every  assignment  in  your  course  takes  you  one  step  forward  in  your 
understanding  of  accounting  practice.  This  assignment  is  a  continuation 
of  the  special  journal  idea.  In  Assignment  7  you  had  the  special  cash  jour- 
nals. Here  you  have  two  more  special  journals,  one  for  purchases  and  one 
for  sales  transactions.  Let  us  review  briefly  the  important  points  about 
each  of  them  as  they  have  been  presented  in  this  assignment. 

First — The  advantages  of  merchandise  records  are  as  follows: 

1.  They  save  time  for  the  accountant,  because  they  do  away  with 
numerous  general  journal  entries. 

2.  They  provide  valuable  information  for  the  proprietor  and  man- 
ager. 

Second — These  special  merchandise  records  are  set  up  in  simple  forms, 
similar  to  the  general  journal  but  more  condensed. 

Third — As  a  general  rule,  only  certain  transactions  are  entered  in  these 
special  journals: 

1.  Purchases  of  merchandise  on  account  are  recorded  in  the  pur- 
chase journal. 

2.  Sales   of  merchandise   on   account  are   entered  in  the  sales 
journal. 

Assignment  8,  Page  16 


3.  Entries  are  made  from  invoices  and  sales  tickets  which  are 
commonly  used  in  the  preliminary  purchase  and  sales  routines 
of  a  business. 

Fourth — Accounting  systems  can  be  extended  still  farther,  by  the  use 
of  other  special  journals,  when  transactions  are  numerous,  for 
example : 

Sales  Returns  Book — Sales  Allowance  Book. 

Purchase  Returns  Book — Purchase  Allowance  Book. 

Entries  are  made  in  these  books  from  credit  memos. 

In  Assignment  9  these  special  journals  will  be  expanded  so  that  they 
can  be  used  with  controlling  accounts. 


Put  energy  and  decision  and  unfaltering  belief  back  of  your  will, 
and  thereby  gain  a  power  that  does  not  recognize  the  possibility  of 
failure. 

— Irving  R.  Allen. 


Assignment  8,  Page  17 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  8 

The  following  questions  and  problems  are  based  for  the  most  part  on 
the  discussion  of  this  assignment.  They  also  involve  accounting  principles 
of  preceding  assignments,  in  this  way  serving  as  a  test  of  your  ability  to 
retain  fundamental  points.  Send  in  solutions  to  any  four  of  the  following 
problems. 

1.  Mr.  Thomas  Ryan  owns  and  operates  a  small  retail  dry  goods  store. 
Fifty  per  cent  of  his  sales  are  on  account,  and  about  75  per  cent  of 
his  purchases  are  on  thirty  to  sixty  days'  time. 

He  also  receives  notes  from  such  customers  as  wish  extension  of  time. 
In  his  merchandising  he  allows  2  per  cent  discount  to  customers  for 
payment  within  ten  days,  and  takes  advantage  of  discount  on  pur- 
chases whenever  possible.  Up  to  this  time  he  has  used  only  one  book 
of  original  entry — the  general  journal. 

What  better  method  can  you  suggest  than  the  one  he  is  using  ?  State 
the  advantages  of  your  method. 

2.  On  June  30,  1921,  he  receives  a  $200.00,  30-day  note,  without  interest, 
from  Mr.  Clark,  one  of  his  customers,  to  cover  Mr.  Clark's  open  ac- 
count. 

(a)  Show  the  entry  Mr.  Ryan  will  make  on  his  books  when  he  receives 
this  note. 

(b)  What  entry  will  he  make  when  Mr.  Clark  pays  this  note  on  July 
30,  1921? 

(c)  On  July  9,  he  receives  a  credit  memo  for  $25.00  from  the  Ameri- 
can Thread  Company  for  a  shortage  in  his  order  of  thread  pur- 
chased on  June  30.    Set  up  the  entry  for  this  transaction. 

(d)  On  July  12  he  gives  a  credit  memo  for  $12.75  to  L.  M.  Casey,  one 
of  his  customers,  for  a  returned  sale.  How  will  this  transaction 
be  handled  on  Mr.  Ryan's  books? 

3.  From  the  transactions  and  comments  below,  make  necessary  entries 
in  the  journal,  cash  book,  purchase  book,  sales  book,  and  sales  allowance 
book.    Send  in  these  books  of  original  entry. 

Oct.    1,    1921,  Daniel  Roberts,  a  retail  lumber  dealer,  began  business  by  investing 
$2,000.00.     (Enter  in  journal  as  original  investment,  also  enter  in  the 
total  column  of  the  cash  book.) 
1     Gave  his  six-months'  note  at  6  per  cent  to  Wm.  Hurd  in  exchange  for 

$2,000.00  in  order  to  obtain  sufficient  current  funds, 
1     Paid  rent  for  October,  $100.00. 
3     Bought,  F.O.B.  mill,  one  car  lumber  on  account  from  Eastman,  Gardiner 

&  Co.,  Laurel,  Miss.,  for  $484.00. 
6    Bought  an  auto  truck  for  $2,000.00  cash. 
8     Bought  office  furniture  for  $600.00  cash. 
10    Received  from  Eastman,  Gardiner  &  Co.  a  credit  memorandum  for  $27.00 

because  of  inferior  grade  lumber  received  on  October  3. 
12     Gave  Eastman,  Gardiner  &  Co.  a  30-day  6  per  cent  note  in  full  of  account. 

Assignment  8,  Page  18 


I 


15     Paid  $20.00  to  laborers  for  unloading  lumber.     Debit  Purchases. 

18     Sold  to  Paul  Meredith  on  account  lumber  for  $507.20. 

20    Bought  office  supplies  of  Oxford  Stationery  Co.  on  account,  $23.70.   These 

supplies  are  used  up  during  the  month  and  should  be  considered  as  an 

expense. 
22    Bought,  F.O.B.  mill,  one  car  lumber  on  account  from  Kola  Lumber  Co., 

Kola,  Miss.,  for  $446.56. 
25     Sold  for  cash  lumber  for  $5.25. 
27    Issued  a  credit  memorandum  to  Paul  Meredith  for  $16.20  as  an  allowance 

for  lumber  sold  on  October  18. 
29     Paid  $11.00  for  labor  for  unloading  car  of  lumber  (debit  Purchases  Account 

thru  the  cash  book). 
31     Sold  to  Vernon  Winkle  on  account  $308.00. 

Post  these  transactions  to  ledger  accounts  of  your  ov.  n.  Do  not  send 
in  your  accounts ;  we  can  tell  from  your  trial  balance  whether  or  not 
your  accounts  are  correct. 

4.  Prepare  and  send  in  the  trial  balance,  before  closing. 

5.  Prepare  and  send  in  a  profit  and  loss  statement  for  the  month  of 
October,  and  a  balance  sheet  as  of  October  31,  1921.  Inventory  of 
lumber  October  31,  1921,  amounted  to  $471.68. 

Make  closing  entries  in  the  journal,  and  post  them  to  the  ledger 
accounts.    Do  not  send  in  the  closing  entries. 

6.  Take  a  trial  balance  after  closing.    Send  in  this  trial  balance. 

Note:  The  journal  entries  and  ledger  entries  required  in  this  problem 
need  not  be  sent  in,  but  the  University  will  include  these  in  the  model 
solution  which  will  be  mailed  to  you. 


Assignment  8,  Page  19 


Higher  Accountancy 

PI  in 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assig,nment  9 

SUBDIVISION  of  tKe  LEDGER 


THE  men  of  big  business  are  beginning  to  realize  more 
than  ever  before  the  absolute  necessity  of  accurate 
and  dependable  accounting  information,  and  the  best 
managed  concerns  are  demanding  not  only  Modern  Ac- 
counting Systems,  but  thoroly  trained  accountants  who 
understand  accounting  theory  and  practice  and  v/ho  can 
furnish  them  the  information  necessary  to  successful 
management. 

W.  A.  LANDERS 

Auditor  and  Credit  Manager 
The  Coca-Cola  Company 


LaSalle  Extension  University 

Chicago 


NHA-9 
11-182 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lig-hter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Iteims 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSali.e  Extension-  University 


SUBDIVISION  OF  THE  LEDGER 

CONTROLLING  ACCOUNTS 

In  a  small  concern  with  few  transactions,  two  books  of  record  would 
usually  be  sufficient.  All  transactions  would  then  be  entered  in  the 
journal,  and  all  accounts  would  be  kept  in  the  ledger. 

When  a  business  grows  larger  and  transactions  become  more  numerous, 
it  is  necessary  to  provide  devices  that  will  save  time  and  assure  greater 
accuracy  in  keeping  the  records.  That  is  the  reason  for  special  journals,  as 
explained  in  Assignments  7  and  8.  Like  transactions  are  set  apart  in 
special  books  of  original  entry.  Cash  transactions  are  entered  in  the  cash 
book,  sales  in  the  sales  journal,  and  purchases  in  the  purchase  journal. 

Several  Books  of  Original  Entry  Used.  The  entries  in  these  books  are 
totaled,  and  these  totals  can  be  posted  to  the  accounts  much  more  quickly 
and  easily  than  the  many  separate  items.  Transactions  that  cannot  be 
entered  in  special  journals  will  be  handled  thru  the  general  journal.  As 
a  result,  we  have  several  books  of  original  entry  from  which  postings  are 
made  to  the  ledger,  instead  of  onlj^  one. 


General  Journal 


Cash  Journal 


Sales  Journal 


Purchase  Journal 


General  Ledger 


The  Subdivision  of  the  Journal 

Figure  1.  This  chart  gives  you  a  short  summary  of  what  was  covered  in  Assignments 
7  and  8.  Instead  of  having  one  book  of  original  entry,  the  journal,  we  now  have  four. 
In  this  assignment  we  shall  see  how  the  general  ledger  is  subdivided  by  the  use  of 

subsidiary  ledgers. 

Need  for  Subdivision  of  Ledger.  Thus  far  in  the  course  our  attention 
has  been  confined  to  the  journal  and  its  subdivisions.  The  ledger  like- 
wise may  be  subdivided,  and  for  the  same  reasons.  As  the  number  and 
variety  of  transactions  increase,  the  ledger  will  sooner  or  later  be  filled 
up  with  many  detailed  accounts.  The  trial  balance  will  become  unwieldy, 
and  the  danger  of  making  errors  will  increase. 

For  these  reasons  accountants  have  devised  a  plan  of  subdividing  the 
ledger.  Accounts  of  a  similar  nature  are  taken  out  of  the  ledger  and  set 
off  by  themselves  in  what  is  called  a  subsidiary  ledger. 

To  illustrate:  Suppose  that  a  business  keeps  fifteen  separate  expense 
accounts,  one  for  heat,  one  for  light,  another  for  salaries,  advertising,  etc. 
It  will  under  such  circumstances  be  desirable  to  take  these  detail  expense 


accounts  out  of  the  general  ledger  and  set  them  apart  in  a  subsidiary  ledger, 
called  the  expense  ledger. 

Another  concern,  engaged  in  manufacturing,  we  will  assume,  buys 
twenty  different  kinds  of  material.  Each  kind  of  material  will  be  recorded 
in  a  separate  account.  All  of  these  material  accounts  are  then  grouped  in 
a  subsidiary  ledger,  called  the  materials  or  stores  ledger.  These  detail 
records  are  all  subsidiary  to  the  general  ledger. 

Subsidiary  Ledgers  for  Personal  Accounts.  Since  a  large  part  of 
modern  business  is  done  on  a  credit  basis,  it  follows  that  the  average  sized 
concern  will  probably  have  numerous  personal  accounts  with  customers 
and  creditors.  If  these  personal  accounts  are  kept  in  the  general  ledger, 
along  with  the  other  accounts,  such  as  cash,  buildings,  delivery  equipment, 
etc.,  the  ledger  will  soon  become  unwieldy. 

When  the  accountant  prepares  the  balance  sheet,  for  example,  he  must 
go  thru  the  general  ledger,  determine  the  balance  for  each  customer,  and 
then  add  these  balances  together  before  he  can  determine  the  total  amount 
due  from  customers,  which  is  the  amount  for  the  accounts  receivable 
item  in  the  balance  sheet.  The  same  difficulty  will  exist  in  determining 
the  amount  for  accounts  payable. 

Furthermore,  the  general  ledger  trial  balance  will  be  exceedingly  long, 
and  the  work  of  securing  a  balance  becomes  a  laborious  task.  The  han- 
dling of  so  many  accounts  by  one  person,  who  is  in  charge  of  the  general 
ledger,  may  easily  result  in  errors,  which  it  will  be  difficult  to  trace. 

Accordingly  the  personal  accounts  of  customers  are  taken  out  of  the 
general  ledger  and  set  up  in  a  subsidiary  ledger  called  the  accounts 
receivable  ledger.  This  ledger  is  sometimes  referred  to  as  the  customers' 
ledger,  or  sales  ledger.  Likewise  the  personal  accounts  of  creditors  may  be 
taken  out  of  the  general  ledger  and  set  apart  in  a  subsidiary  ledger,  some- 
times referred  to  as  the  creditors'  ledger  or  purchase  ledger. 

For  purposes  of  illustration  let  us  assume  that  on  June  30,  1921,  our 
general  ledger  contains  the  following  customers'  balances: 

B.   L.   Crowe $485.00 

Public  Market  Co 370.00 

L.  M.  Brown 700.00 

Oscar    Green 150.00 

Wm.   Mobley 238.00 

O.  Long  &  Co 75.00 

Henry   Weeks 100.00 

A.    C.    Clancy 210.00 

Our  business  is  grov/ing,  and  as  it  increases  we  find  it  desirable  to 
develop  a  separate  ledger  for  customers'  accounts.  We  cannot,  however, 
merely  remove  these  accounts,  and  set  them  off  in  a  subsidiary  ledger, 
without  having  something  to  take  their  place  in  the  general  ledger.  If 
we  put  nothing  in  their  place  the  ledger  will  be  thrown  out  of  balance.  We 
therefore  close  each  of  these  customers*  accounts  by  means  of  a  journal 


Assignment  9,  Page  2 


entry.  Since  each  of  these  accounts  in  the  general  ledger  has  a  debit 
balance,  it  will  be  necessary  to  credit  each  account  in  order  to  close  it,  and 
at  the  same  time  we  must  set  up  a  representative  account  in  the  ledger,  to 
which  we  will  debit  the  total.  In  this  way  the  equality  of  debits  and  credits 
•is  maintained  in  the  ledger.    The  journal  entry  will  appear  as  follows: 

June  30,  1921,  Dr.  Accounts  Receivable $2,328.00 

Cr.    B.  L.  Crowe $485.00 

Public  Market  Co 370.00 

L.  M.  Brown _.._ 700.00 

Oscar   Green _ 150.00 

Wm.  Mobley 238.00 

O.  Long  &  Co _ 75.00 

Henry   Weeks 100.00 

A.  C.  Clancy 210.00 

To  close,  in  the  general  ledger,  the  individual  accounts 
of  customers,  and  set  up  a  representative  account  with 
the  total.  The  individual  accounts  are  to  be  set  up  in  the 
subsidiary  accounts  receivable  ledger. 

When  this  journal  entry  has  been  posted,  the  personal  accounts  will 
disappear  from  the  general  ledger.  The  "Accounts  Receivable  Account" 
will  take  their  place  and  will  show  the  total  amount  due  from  customers. 

Customers'  Ledger.  The  next  thing  to  do  is  to  set  up  these  same 
personal  accounts  for  all  customers  in  the  customers'  ledger.  Each 
customer  will  be  given  a  separate  account  with  the  old  balance  entered, 
just  as  it  appeared  before  in  the  general  ledger.  In  setting  up  these  new 
accounts  it  is  not  necessary  to  make  a  journal  entry,  because  it  is  not 
necessary  that  the  subsidiary  ledger  be  in  balance.  The  accounts  in  the 
subsidiary  ledger  are  statistical  in  nature.  They  are  merely  the  details, 
which  are  summarized  and  represented  in  the  general  ledger  by  the 
balance  of  the  Accounts  Receivable  or  Customers'  Ledger  Account.  In 
other  words,  the  total  amount  in  the  Accounts  Receivable  Account  of  the 
general  ledger  will  agree  with  the  sum  of  the  balances  in  the  customers' 
accounts  of  the  subsidiary  ledger.    The  agreement  is  shown  in  Figure  2. 

Eight  Entries  in  Subsidiary 
Ledger  (Accounts  Receivable) 


B.  L.  Crowe $485.00 

Public  Market  Co.  .  .   .  370.00 

L.  M.  Brown 700.00 

Oscar  Greea  150. 00 

Wm.  Mobley   238.00 

0.  Long  &  Co 75.00 

Henry  Weeks  100.00 

A.  C.  Clancy 210.00 

Total $2,328.00 


One  Entry  in  General  Ledger 


Accounts  Receivable 


$2,328.00 


I 


Chart  Showing  Agreement  between  the  Subsidi.'Vry  Ledger  and  the  General  Ledger 

Figure  2.    In  the  subsidiary  ledger  there  is  an  account  for  each  customer,  while  in  the 

general  ledger  we  have  one  account  for  all  accounts  receivable,  to  which  is  debited  an 

amount  equal  to  ALL  the  debit  balances  of  the  subsidiary  ledger. 


Assignment  9,  Page  3 


Use  of  Subsidiary  Ledgers  Affects  Form  of  Journals.  Now  that  we 
have  explained  the  customers'  ledger,  we  must  know  how  to  record  busi- 
ness transactions  so  that  they  will  not  only  be  brought  into  the  general 
ledger  but  also  into  the  subsidiary  ledgers.  To  understand  this  fully  we 
shall  trace  certain  transactions  from  the  various  books  of  original  entry 
into  the  general  and  the  subsidiary  ledgers. 

We  can  assume  for  purposes  of  illustration  that  during  the  first  week 
in  July  we  have  the  following  transactions  with  customers. 

TRANSACTIONS  WITH  CUSTOMERS  WHO  BUY  ON  ACCOUNT 

July  1.     Sold  merchandise  on  account  to  Oscar  Green _ $135.00 

Received  cash  from  L.  M.  Brown  to  apply  on  account.. ._ 500.00 

Received  cash  from  Henry  Weeks  to  apply  on  account 100.00 

2.     Sold  merchandise  on  account  to  L.  J,  Getz 975.00 

Sold  merchandise  on  account  to  Public  Market   Co.. „...     85.00 

Received  cash  from  Public  Market  Company  to  apply  on  ac- 
count     _ „ 300.00 

5.  Sold  Merchandise  on  account  to  Knight  C.  Coffee 250.00 

Sold  merchandise  on  account  to  Wilbur  Lutes „.  300.00 

Sold  merchandise  on  account  to  Oscar  Green 265.00 

Sold  merchandise  on  account  to  Alra  Wheeler 141.21 

Received  cash  from  B.  L.  Crowe  to  apply  on  account 485.00 

6.  Received  cash  from  Oscar  Green  to  apply  on  account 500.00 

Received  cash  from  A.  C.  Clancy  to  apply  on  account 210.00 

Sold  merchandise  on  account  to  Isaac  Tabor _ 420.15 

7.  Received  cash  from  0.  Long  &  Company  to  apply  on  account    75.00 
Sold  merchandise  on  account  to  Albert  Orr  &  Son 90.00 

When  these  transactions  are  entered  in  the  books  of  original  entry,  all 
sales  on  account  are  entered  in  the  sales  journal,  as  shown  in  Figure  3, 
and  all  cash  received  from  customers  to  apply  on  their  accounts  is  entered 
on  the  left-hand  side  of  the  cash  journal,  as  shown  in  Figure  4. 

SALES  JOURNAL 


SALES 

SALES 

Date 

L.P. 

ACCOUNT  DEBITED 

ADDRESS 

TERMS 

No. 

CREDIT 

1921 

July 

1 

Oscar  Green 

109  E.  31st  St. ,  Chicago,  111. 

n/30 

22 

135 

00 

2 

L.  J.  Getz 

20  Wentworth  Ave. ,  New  York 

n/30 

23 

975 

00 

2 

Public  Market  Co. 

2732  4th  St. ,  Chicago 

n/30 

24 

85 

00 

5 

Knight  C.  Coffee 

413  Indiana  St.,  Boston,  Mass. 

n/10 

25 

250 

00 

5 

Wilbur  Lutes 

19  College  St.,  Indianapolis,  Ind. 

n/30 

26 

300 

00 

5 

Oscar  Green 

109  North  St. ,  Chicago 

n/30 

27 

265 

00 

5 

Alra  Wheeler 

3714  Washington  Ave. ,  Chicago,  111. 

n/30 

28 

141 

21 

6 

Isaac  Tabor 

927  Lincoln  St. ,  Chicago,  111. 

n/30 

29 

420 

15 

7 

Albert  Orr  &  Son 

52  Hamline  St.,  St.  Paul,  Minn. 

n/30 

31 

90 

00 

7 

Total  Sales  on 
Account 

(Dr.  Accounts  Rec,  Cr.  Sales) 

2,661 

36 

The  Sales  Joijbnal 

Figure  3.    This  Sales  Journal  contains  all  sales  to  customers  on  account  from  July  1 
to  July  7.    The  cash  received  from  customers  is  entered  in  the  Cash  Book,  Figure  4. 


Assignment  9,  Page  4 


CASH  JOURNAL    (Receipts  Side) 


GENERAL 

CUSTOMERS 

Date 

L.F. 

NAME  OF  ACCOUNT 

EXPLANATION 

LEDGER 

LEDGER 

TOTAL 

CREDITED 

CREDITS 

CREDITS 

1921 

July 

1 
1 
1 
2 
4 
5 
5 

6 
6 

6 

7 

Balance 

L.  M.  Brown 

Henry  Weeks 

Public  Market  Co. 

Sales 

B.  L.  Crowe 

Purchase  Returns 

Oscar  Green 
Notes  Payable 

A.  C.  Clancy 
0.  Long  and  Co. 

Currency  to  apply  on  ac. 

For  day 

Currency  on  Account 

Rebate  from  Murdock  Co. 

for  Spoiled  Goods 
To  Apply  on  Account 
Borrowed  of  First  National 

Bank,  30  days 

To  Apply  on  Account 
It   It   II     It 

29 

10 

500 

10 
15 
00 

500 
100 
300 

485 

500 

210 
75 

00 
00 
00 

00 

00 

00 
00 

3,146 

20 

7 

Sales 

Credit  Account 
Debit  Cash  Ace 

For  day 
s  Receivable 

113 

35 

2,822 
5,968 

60 
80 

652 

60 

2,170 

00 

ount--Total  Received  in  Janua 

ry, . . 

The  Cash  Journal  (Receipts  Side) 

Figure  4.    You  will  note  that  all  cash  received  from  customers  is  recorded  in  a  special 
column  so  that  at  the  end  of  the  period  the  total  can  be  posted  as  a  credit  to  the  ac- 
counts receivable  account.    All  other  cash  receipts  which  are  entered  in  the  general 
ledger  credits  column  are  posted  separately  to  the  general  ledger. 

Postings  Made  from  Sales  Journal  and  Cash  Journal.  The  posting 
from  the  sales  journal  to  the  general  ledger  and  to  the  subsidiary  ledger 
can  be  summarized  thus: 


I 


To  the  general  ledger 

Debit   Accounts   Receivable $2,661.36 

Credit    Sales _ $2,661.36 

To  the  subsidiary  ledger  (Accounts  Receivable) 
Debit  (to  each  customers'  Account  separately) 

Oscar   Green   $135.00 

L.  J.   Getz 975.00 

Public  Market  Co 85.00 

Knight  Co.  Coffee 250.00 

Wilbur  Lutes  300.00 

Oscar  Green  265.00 

AIra  Wheeler „ 141.21 

Isaac  Tabor  420.15 

Albert  Orr  &  Son „ 90.00 


Assignment  9,  Page  5 


The  postings  from  the  cash  book  (receipts  side)  to  the  general  ledger 
and  to  the  subsidiary  ledger  are  made  as  follows : 

I  1.    To  the  general  ledger 

I  Debit   Cash   $2,822.60 

i  Credit  Accounts  Receivable  (total) $2,170.00 

;  Credit  to  Each  Account  Separately: 

Sales    29.10 

Purchase    Returns    10.15 

Notes    Payable    500.00 

Sales    113.35 

2.    To  the  subsidiary  ledger  (Accounts  Receivable) 

Credit  (to  each  customer's  account  separately) 

L.  M.  Brown $500.00 

Henry  Weeks  100.00 

Public   Market   Co 300.00 

B.   L.   Crowe 485.00 

Oscar  Green   500.00 

A.  C.  Clancey 210.00 

0.  Long  &  Co 75.00 

General  Rules  for  Postings  from  Sales  and  Cash  Journals 

1.  From  the  sales  journal  post  the  total  as  a  debit  to  the  Accounts 
Receivable  Account  and  the  credit  to  the  Sales  Account.  In  addition,  post 
each  item  separately  as  a  debit  to  the  personal  accounts  of  the  subsidiary 
ledger.    The  exact  procedure  is  shown  in  Figure  5. 

By  posting  one  total  debit  to  Accounts  Receivable  Account  and  numerous 
debits  to  the  individual  customers'  accounts,  we  may  seem  to  be  violating 
the  double  entry  principle  that  every  debit  should  have  a  corresponding 
credit.  This  is  not  the  case  however.  The  customers'  accounts  constitute 
a  subsidiary  ledger,  and  are  therefore  not  incorporated  in  the  trial  balance. 
What  appears  to  be  two  debits  with  but  one  credit  is  in  reality  one  debit 
and  one  credit  to  the  general  ledger,  and  one  duplicated  record  in  the 
subsidiary  ledger. 

2.  From  the  cash  journal  (receipts  side)  post  the  total  cash  received 
as  a  debit  to  the  Cash  Account.  Post  the  total  cash  received  from  customers 
as  a  credit  to  the  Accounts  Receivable  Account.  Post  each  of  the  items  in  the 
general  ledger  credits  column  as  a  credit  to  the  proper  account  in  the 
general  ledger.  In  addition,  post  each  item  in  the  "Customers'  Ledger 
Credits"  column  as  a  credit  to  the  personal  accounts  of  customers  in  the 
subsidiary  ledger.    Figure  6  is  a  graphic  reproduction  of  the  procedure. 

(Continued  on  Page  9) 


Assignment  9,  Page  6 


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Assignment  9,  Page  8 


Ledger  Accounts  After  Postings  Have  Been  Made.  When  the  sales 
journal  and  cash  journal  have  been  posted  to  the  ledger  accounts,  as  in- 
dicated, the  accounts  will  appear  as  shown  in  Figure  7  (general  ledger 
accounts)  and  in  Figure  8  (customers'  ledger  accounts) . 

GENERAL  LEDGER  ACCOUNTS 


DATE 

ITEMS 

Fol. 

J 

DEBITS 

DATE 

ITEMS 

Fol. 

/ 

CREDITS 

1921 
June 
July 

30 
7 

Balance 

Total  cash  received 

C 

3,146 
2,822 

20 
60 

Sales 


1921 

July 

4 
7 
7 

Cash 
Cash 
Total  on  account 

C 
C 
S 

29 

113 

2,661 

10 
35 
36 

Accounts  Receivable 


1921 

1921 

June 

30 

Balance 

2,328 

00 

July 

7 

Cash  from  customers 

C 

2,170 

00 

July 

7 

Total  sales  on 

account 

S 

2,661 

36 

7 

Balance 

2,819 

36 

Notes  Payable 


1921 

July 

6 

Borrowed  from  Bank 

C 

500 

00 

Puechase  Retijbns 


1921 

July 

6 

Rebate  from  Murdock 
k  Co. 

C 

10 

15 

General  Ledges  Accounts 

Figure  7.    Check  up  each  of  these  postings.    The  amounts  given  in  these  accounts  as 
balances  represent  the  balances  as  they  appeared  on  June  30,  1921. 


Assignment  9,  Page  9 


CUSTOMERS'  LEDGER  ACCOUNTS 
B.  L.  Crowe 


DATE 

ITEMS 

Fol. 

; 

DEBITS 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1921 

June 

30 

Balance 

485 

OC 

1921 
July 

5 

Cash 

C 

485 

00 

PuBuc  Market  Co. 


1921 

June 
July 


Balance 
Mdse.  Sale 


111921 

370  OOllJuly 

2 

s 

85  00|| 

Cash 


300  00 


L.  M.  Beown 


1921 
June 

30 

Balance 

700 

00 

1921 

July 

1 

Cash 

C 

500  00 

OSCAB  GbEBN 


1921 

1921 

June 

30 

Balance 

150 

00 

July 

6 

Cash 

C 

500 

00 

July 

1 
5 

Mdse.  Sale 
Mdse.  Sale 

S 
S 

135 
265 

OC 
00 

Wm.  U.  Mobley 


1921 
June 

30 

Balance 

238 

00 

1921 

O.  Long  &  Company 


1921 
June    30 


Balance 


75 


OC 


1921 
July 


Cash 


75 


00 


A.  C.  Clancy 


[1921 
June 


30 


Balance 


210 


00 


L921 

July 


Cash 


210 


00 


Henry  Weeks 

1921 

June 

30 

Balance 

111921 
100  0C[JuIy   1  Cash 

C 

100 

00 

1 

Assignment  9,  Page  10 


L. 

G. 

Getz 

DATE 

ITEMS 

Fol. 

/ 

DEBITS 

DATE 

ITEMS 

Pol. 

/ 

CREDITS 

1921 

July 

2 

Mdse. 

Sale 

S 

975 

00 

1921 

Knight  C.  Coffee 

fl921 
July 

5 

Mdse. 

Sale 

S 

250 

oc 

1921 

Wii^uR  Lutes 

1921 
July 

5 

Mdse. 

Sale 

S 

300 

00 

1921 

Alva  Wheeler 

11921 
July 

5 

Mdse. 

Sale 

S 

Ul 

21 

1921 

Isaac  Tabor 

1921 

July 

6 

Mdse. 

Sale 

S 

420 

1921 
15 

Albert  Orr  &  Son 

1921 
July 

7 

Mdse. 

Sale 

S 

900C 

1921 

Customers'  Ledger  Accounts 
Figure  8.    These  accounts  show  the  balances  as  taken  over  from  Figure  2  and  the 
amounts  posted  from  the  sales  journal  of  Figure  3  and  the  cash  journal  of  Figure  4. 
Notice  that  four  of  the  accounts  are  closed  and  double  ruled,  since  the  customers  have 

paid  their  accounts. 

Accounts  Payable  Ledger.  What  has  been  said  concerning  the  develop- 
ment of  a  special  ledger  for  customers  is  equally  applicable  to  the  develop- 
ment of  a  special  ledger  for  creditors. 

The  creditors'  accounts  are  removed  from  the  general  ledger  in  the 
same  way  as  the  customers'  accounts,  namely,  by  journal  entry.  A  journal 
entry  is  made  closing  each  of  the  creditors'  accounts  and  setting  up  a 
representative  account  in  the  ledger  to  take  its  place,  namely.  Accounts 
Payable  Account.  To  illustrate,  let  us  assume  that  our  general  ledger 
contains  the  following  creditors'  accounts: 

Northern   Milling   Company - $100.00 

McKenzie   Produce   Company 163.25 

Grocery  Supply  Company 274.62 

Swift  &  Company 310.17 


Assignment  9,  Page  11 


The  following  journal  entry  will  close  the  personal  accounts  of  creditors 
in  the  general  ledger: 

June  30,  1921,  Debit     Northern  Milling  Company „...$100.00 

McKenzie  Produce  Company _„.  163.25 

Grocery  Supply  Company „ 274.62 

Swift  &  Company 310.17 

Credit  Accounts  Payable $848.04 

After  this  journal  entry  has  been  posted,  the  old  personal  accounts  of 
the  creditors  in  the  general  ledger  will  stand  closed  (double  ruled)  and 
the  new  representative  or  summary  account  will  appear,  with  the  total 
$848.04  on  the  credit  side. 

New  creditors'  accounts  should  then  be  provided  in  the  subsidiary 
creditors'  ledger.  Each  account  will  be  credited  with  the  balance  appear- 
ing in  the  list  above.  The  sum  of  these  credit  balances  in  the  subsidiary 
ledger  will  agree  with  the  total  appearing  in  the  representative  account, 
accounts  payable,  in  the  general  ledger. 

How  to  Record  Transactions  with  Creditors.  After  all  the  creditors' 
accounts  have  been  removed  from  the  general  ledger  to  the  creditors' 
ledger,  and  a  summary  account.  Accounts  Payable  or  Purchase  Ledger 
Account,  has  been  set  up  in  the  general  ledger  to  represent  them,  the 
transactions  with  creditors  are  recorded  in  a  way  similar  to  the  trans- 
actions with  customers.  The  books  of  original  entry,  in  which  transactions 
with  creditors  are  recorded,  are  the  purchase  journal  and  the  cash  journal 
(disbursements  side).  All  purchases  on  account  are  entered  in  the  pur- 
chase journal,  and  all  cash  paid  out  to  creditors  is  recorded  in  the  cash 
journal  on  the  disbursement  side. 

Assume  that,  during  the  first  week  of  July,  1921,  we  have  the  following 
transactions  with  creditors. 

TRANSACTIONS  WITH  CREDITORS 

July  1, 1921.  Bought  merchandise  from  Grocery  Supply  Co.;  Terms,  n/30.$l,250.00 
5,  Paid  cash  to  Swift  &  Company  to  apply  on  account 200.00 

5,  Bought  merchandise  from  Alpha  Grocery  Co.;  Terms,  n/30      780.75 

6,  Paid  cash  to  Northern  Milling  Company  in  full  of  account      100.00 

6,  Paid  cash  to  McKenzie  Produce  Company 150.00 

7,  Bought  merchandise  from  Swift  &  Co.;    Tenns,  2/10-n/30-      910.00 

7,  Bought  from  Grocery  Supply  Co.;  Terms,  n/30 _ 405.15 

7,  Paid  cash  to  Grocery  Supply  Company,  to  apply  on  account  1,000.00 

This  list  contains  two  kinds  of  transactions  with  creditors,  purchases 
on  account  and  cash  payments  to  creditors.  The  purchases  are  entered  in 
the  purchase  book  of  Figure  9  and  the  cash  payments  are  entered  in  the 
cash  journal  of  Figure  11. 

Purchase  Journal.  With  the  purchases  on  account  properly  entered, 
the  purchase  journal  will  appear  as  shown  in  Figure  9. 


Assignment  9,  Page  12 


PURCHASE  JOURNAL 


DATE 

L.P. 

ACCOUNT  CREDITED 

ADDRESS 

TERMS 

INV. 
No. 

MDSE. 
PUR.  DR. 

1921 

July 

1 
5 
7 
7 

Grocery  Supply  Company 
Alpha  Grocery  Company 
Swift  &  Company 
Grocery  Supply  Company 
Total  Purchases: 

Debit:  Purchases  Acct 
Credit:  Acct  Payable  Acct 

48  Walnut  St. 
114  5th  St. 
2000  S.  Western  Ave 
48  Walnut  St. 

n/30 

n/30 

2/10-n/30 

n/30 

1 

2 
3 
4 

1,250 
780 
910 
405 

00 
75 
00 
15 

3,345 

90 

The  Purchase  Journal 
Figure  9.    These  transactions  with  creditors  involve  purchases,  and  would  therefore  be 

entered  in  a  purchase  journal. 

Postings  are  made  from  the  purchase  journals  as  indicated  by  the  dia- 
gram in  Figure  10. 


Purchase  Book 


Terms 


Inv. 
Ho. 


Total 


Mdse. 
Pur.  . 
Dr. 


1.250.00. 

780.75. 

910.00. 

405.15. 
3,545.y'C)'. 


Creditors 
Ledger 


General 
Ledger 


Chart  Showing  Posting  op  Puhchasb  Journal 

Figure  10.    The  total  of  the  purchase  journal  is  posted  to  the  general  ledger  at  the  end 
of  the  period  as  a  debit  to  the  purchases  account,  and  a  credit  to  accounts  payable 
account.    In  addition,  each  item  is  posted  as  a  credit  to  the  proper  account  in  the  cred- 
itor's ledger. 


Assignment  9,  Page  13 


The  Cash  Journal  (Disbursements  Side).  Figure  11  indicates  how  all 
cash  paid  to  creditors  is  recorded  in  the  cash  journal  on  the  disbursements 
side: 

CASH  JOURNAL  (Disbursements) 


DATE 

L.P. 

NAME  OP 
ACCOONT  DEBITED 

EXPLANATION 

GENERAL 
LEDGER 
DEBITS 

CREDITORS' 
LEDGER 
DEBITS 

TOTAL 

1921 
July 

2 
2 
5 
6 
6 
6 
7 

Purchases 

Expense 

Swift  &  Company 

Northern  Milling  Co. 

McKenzie  Produce  Co. 

Delivery  Equipment 

Grocery  Supply  Co. 

Debit:  Accounts  Payab 
Credit:  Cash  Acco 

Merchandise 

Rent  for  July 

Cash  to  Apply  on  Acct. 

Cash  to  Apply  on  Acct. 

Cash  to  Apply  on  Acct. 

Horse  and  Wagon 

Cash  to  Apply  on  Acct. 

le  Account  (Total) 

60 
120 

150 

00 
00 

50 

200 
100 
150 

1,000 

00 
00 
00 

00 

1,780 

50 

330 

50 

1,450 

00 

unt  (Total) 

The  Cash  Journal  (Disbtjesements  Side) 

Figure  11.  All  cash  payments  to  creditors  are  recorded  together  in  a  special  column, 
headed  "Creditors'  Ledger  Debits,"  in  order  that  at  the  end  of  the  period  the  total  can 
be  posted  as  shown  in  Figure  12.  All  payments  for  other  purposes,  as  for  a  cash  pur- 
chase, rent,  etc.,  are  kept  in  a  separate  column,  so  that  they  can  be  posted  as  separate 

items. 

Posting  of  Cash  Book.    A  study  of  the  diagram  shown  in  Figure  12  will 
show  exactly  how  the  posting  of  the  cash  book  is  done. 


General 
Ledger 


Cash  Jottrnal  (Bis'bursements) 


General 

ledger 

Debits 


/\. 


■    60.00 
■120.00 


.160.50 
S30.i>0 


Creditors' 

Ledger 

Debits 


200.00. 

100.00. 

150.00. 

1,000.00. 


Total 


1,450.00  Jjotal  debit 
to  accounts  payable 
1,780.50 


Total  credjlt- 
ed  to  oasli 


.^  Creditors* 
■>►    Ledger 


Chart  Shovv-ing  Posting  of  Cash  Journal 
Figure  12.  Each  item  in  the  creditors'  ledger  debits  column  is  posted  as  a  debit  to  the 
proper  creditors'  account  in  the  subsidiary  ledger,  and  each  item  in  the  general  ledger 
debits  column  is  posted  as  a  debit  to  the  proper  account  in  the  general  ledger.  The 
total  amount  of  cash  paid  to  creditors,  $1,450.00,  is  posted  as  a  debit  to  the  accounts 
payable  account,  and  the  total  amount  of  cash  paid  out,  both  to  creditors  and  for  other 
purposes,  is  posted  as  a  credit  to  the  cash  account. 


Assignment  9,  Page  14 


Ledger  Accounts  After  Postings.  When  the  purchase  journal  and  cash 
journal  have  been  posted,  the  general  ledger  accounts  will  appear  as  shown 
in  Figure  13. 


GENERAL  LEDGER 
Cash 


DATE 

ITEMS 

Fol. 

\f 

DEBITS 

DATE 

ITEMS 

Fol. 

i 

CREDITS 

1921 
June 
July 

30 
T 

Balance 

Total  cash  received 

C 

3,146 
2,822 

20 
6C 

1921 
July 

7 

Total  cash  disbursed 

C 

1,780 

50 

Purchases 


1921 

1921 

Jaly 

7 
T 

Cash 

Total  on  Account 

C 

P 

60 
3,345 

00 
90 

Accounts  Payable 


1921 

111921 

July 

7 

Cash  paid  to 

June 

30 

Balance 

848 

04 

creditors 

C 

1,450 

00 

July 

7 

Total  on  Account 

P 

3,345 

90 

7 

Balance 

2,743 

94 

Expense 


1921 
July 


2    Cash,  Rent 


120 


1921 


ooy 


Deuvery  Equipment 


1921 
July 

6 

Horse  and  wagon 

C 

150 

5C 

L921 

General  Ledger  Accounts 

Figure  13.  The  other  accounts  in  the  general  ledger,  as  sales,  accounts  receivable,  notes 
payable,  and  purchase  returns,  which  were  given  in  Figure  7,  are  not  aflFected  by  the 
postings  from  the  purchase  journal  and  the  cash  journal  disbursements  side.  For  this 
reason  these  accounts  are  not  presented  here;  neither  are  the  accounts  in  the  cus- 
tomers' ledger  shown. 

Figure  14  shows  how  the  creditors'  accounts,  in  the  creditors'  ledger 
will  appear. 


Assignment  9,  Page  1§ 


CREDITORS'  LEDGER 

Northern  Milung  Company 


DATE 

ITEMS 

Fol. 

/ 

DEBITS 

DATE 

ITEMS 

Pol. 

/ 

CREDITS 

1921 

July 

6 

Cash  to  apply  on 
account 

C 

100 

00 

1921 
June 

30 

Balance 

100 

00 

McKenzie  Produce  Company 

1921 
July 

6 

Cash  to  apply  on 
account 

C 

150 

OC 

1921 
June 

30 

Balance 

163 

25 

Grocery  Supply  Company 


1921 

1921 

July 

7 

Cash  to  apply  on 

June 

30 

Balance 

274 

62 

account 

C 

1,000 

00 

July 

1 
7 

On  account 
On  account 

P 
P 

1,250 
405 

00 
15 

Swift  &  Company 

1921 
July 

5 

Cash  to  apply  on 
account 

C 

200 

OC 

921 

lune 
July 

30 

7 

Balance 
On  account 

P 

310 
910 

17 
00 

Alpha  Grocery  Company 


1921 

1921 
July 

5 

On  account 

P 

780 

75 

Creditors'  Ledger  Accounts 

Figure  14.  These  creditors'  accounts  now  show  all  the  items  after  they  have  been  posted 

from  the  purchase  journal  and  the  cash  journal,  disbursements  side.     You  will  also 

notice  that  the  account  for  the  Northern  Milling  Company  is  balanced  and  ruled,  since 

their  account  is  paid  in  full.    The  amounts  shown  as  balances  on  June  30,  were  brought 

into  the  accounts  when  the  subsidiary  ledger  was  set  up,  as  on  page  12. 

Miscellaneous  Transactions  Entered  in  General  Journal.  We  may  have 
some  transactions  with  customers  and  creditors,  which,  because  of  their 
nature,  would  not  be  entered  in  the  sales  journal,  purchase  journal,  or  cash 
journal.  Such  transactions  are  therefore  entered  in  the  general  journal. 
Suppose,  for  example,  that  Wm.  U.  Mobley,  one  of  our  customers,  gives  us 
on  July  8  a  note  for  $200.00  to  apply  on  his  account.  This  transaction 
would  be  entered  in  the  general  journal  thus: 

July  8.    Notes  Receivable _ $200.00 

Accounts   Receivable _ $200.00 

Received  Wm.  U.  Mobley's  30  day  note  to  apply  on  account. 

When  this  entry  is  posted  care  must  be  taken  to  post  the  credit  item 
twice,  once  to  the  credit  side  of  the  summary  account.  Accounts  Receivable, 
in  the  general  ledger,  and  also  to  the  credit  side  of  his  personal  account  in 
the  customers'  ledger. 


Assignment  9,  Page  16 


For  further  illustration,  assume  that  we  return  some  merchandise  that 
was  of  inferior  quality  to  the  Grocery  Supply  Company,  and  they  allow  us 
$25.00  credit.  This  transaction  involves  a  purchase  allowance,  and  will  be 
entered  in  the  general  journal  thus: 

July  9.    Accounts  Payable $25.00 

Purchase    Allowances $25.00 

Credit  received  for  inferior  goods. 

When  this  entry  is  posted  the  debit  item  must  be  posted  to  the  general 
ledger  and  also  to  the  subsidiary  ledger,  while  one  credit  is  made  to  the 
Purchase  Allowances  Account  in  the  general  ledger. 

How  Three  Ledgers  Are  Related.  Now  instead  of  having  only  one  ledger, 
we  have  three  separate  ledgers,  namely,  the  general  ledger,  customers* 
ledger,  and  creditors'  ledger.  The  general  ledger  is  complete  in  itself.  It 
contains  all  the  general  or  impersonal  accounts  that  make  up  the  trial 
balance.  Two  of  these  accounts.  Accounts  Receivable  and  Accounts  Payable, 
are  summary  or  representative  accounts.  In  other  words,  these  two 
accounts  represent  or  summarize  in  detail  the  personal  accounts  of 
customers  and  creditors  which  have  been  taken  out  of  the  general  ledger 
and  set  up  in  the  two  subsidiary  ledgers. 

The  subsidiary  ledger,  accounts  receivable  ledger,  is  a  detail  record  of 
all  customers'  accounts.  It  is  not  an  essential  part  of  the  general  ledger. 
•It  is  merely  statistical.  It  gives  the  facts  supporting  the  total  in  the 
Accounts  Receivable  Account  of  the  general  ledger.  When  the  trial  balance 
of  the  general  ledger  is  taken  the  detailed  customers'  accounts  in  the 
accounts  receivable  ledger  are  not  included,  since  they  are  represented  in 
the  general  ledger  by  the  total  in  the  Accounts  Receivable  Account.  This 
account  is  the  connecting  link  between  the  accounts  receivable  ledger 
and  the  general  ledger,  because  the  total  in  the  Accounts  Receivable  Ac- 
count must  agree  with  the  sum  of  the  balances  in  the  customers'  accounts 
in  the  subsidiary  accounts  receivable  ledger. 

The  accounts  payable  ledger  stands  in  a  similar  subsidiary  position  to 
the  general  ledger.  The  balance  of  the  Accounts  Payable  Account  will 
agree  with  the  sum  of  the  balances  of  the  creditors'  accounts  in  the  sub- 
sidiary ledger.  Likewise  the  creditors'  accounts  in  the  subsidiary  ledger 
are  not  included  in  the  trial  balance  of  the  general  ledger.  They  are  rep- 
resented by  the  total  in  the  Accounts  Payable  of  the  general  ledger. 

The  general  ledger  furnishes  all  information  for  the  trial  balance,  and 
consequently  the  accounts  shown  on  the  financial  statements  are  all  con- 
tained in  the  general  ledger.  Therefore,  the  accounts  shown  in  the  sub- 
sidiary ledgers  appear  in  detail  neither  in  the  general  ledger  trial  balance 
nor  on  the  financial  statements ;  they  simply  represent  a  detailed  analysis 
of  such  summary  accounts  as  Accounts  Receivable  and  Accounts  Payable. 

Assignment  9,  Page  17 


The  relation  of  the  three  ledgers  to  the  books  of  original  entry  is 
shown  in  the  diagram  of  Figure  15. 


General 
Journal 


Sales  Journal 


t    General  Ledger   t 
T  T 


Ptir chase  Journal 


fr* 


t    t  "' 

s   s  s 

Cuetomers'   Ledger 


Creditors'  Ledget 

=^ 


Chart  Showing  Rel.-\tion  of  Four  Books  of  Original  Entry  to  the  Three  LeoGHt^ 

Figure  15.  The  first  line  of  this  chart  is  broken  up  into  four  parts,  representing  the 
four  books  of  original  entry.  Most  of  the  transactions  of  a  business  are  entered  in 
these  books.  Below  these  four  books  you  note  the  general  ledger  and  the  two  subsidiary 
ledgers.  Follow  the  arrowed  lines  and  you  will  see  how  the  four  books  of  original  entry 
are  posted.  From  three  of  them  totals  are  posted  to  the  general  ledger,  namely,  the  casfi 
journal,  sales  journal,  and  purchase  journal,  as  indicated  by  the  arrows  marked  "T"; 
all  the  other  arrows  marked  "S"  represent  the  posting  of  detailed  items.  You  can  use 
this  chart  to  advantage  in  reviewing  the  important  principles  of  assignment  9. 

Meaning  of  the  Term  "Controlling  Accounts."  The  summary  accounts 
— Accounts  Receivable  and  Accounts  Payable — often  referred  to  as  sales 
ledger  accounts  and  purchase  ledger  accounts — which  are  set  up  in  the 
general  ledger  to  represent  the  personal  accounts,  are  designated  in  ac- 
counting by  the  term  "controlling  accounts,"  and  they  will  be  so  referred 
to  in  the  subsequent  assignments  of  your  course. 

Such  accounts  are  called  controlling  accounts  because  of  the  independent 
check,  or  proof,  they  give  of  the  correctness  of  the  subsidiary  ledgers. 
The  balance  of  the  Accounts  Receivable  Account,  for  example,  should  be,  at 
the  end  of  any  accounting  period,  exactly  the  same  amount  as  the  total  of 
the  balances  in  the  customers'  ledger. 

Purpose  of  Controlling  Accounts.  Controlling  accounts  are  a  means  of 
localizing  errors,  because  they  represent  in  every  case  a  total  which  can 
be  proved  by  other  records.  If  a  controlling  account  "proves,"  then  we 
do  not  need  to  check  further  the  accounts  in  that  subsidiary  ledger.  The 
search  for  errors  is  thus  limited  to  that  portion  of  the  accounting  record 
for  which  there  is  no  sectional  test.  This  means  a  tremendous  saving  of 
time  when  a  business  has  hundreds  of  accounts  with  customers  and 
numerous  accounts  with  creditors. 

This  so-called  "internal  check"  is  one  of  the  best  means  of  detecting 
errors.    This  system  simply  involves  the  checking  of  one  person's  work 


Assignment  9,  Page  18 


agaiiiiSt  the  work  of  another  person,  which  is  made  possible  by  the  use  of 
controlling  accounts.  If  A,  a  ledger  clerk,  takes  care  of  our  customers' 
ledger,  posting  the  detail  items  from  the  various  books  of  original  entry 
to  the  customers'  personal  accounts,  and  nothing  else,  his  work  can  be 
checked  with  that  of  B,  who  takes  care  of  the  general  ledger,  and  conse- 
quently makes  the  posting  to  the  controlling  accounts.  Should  either  A  or 
B  make  an  error  in  connection  with  the  entries  made  in  the  controlling 
account  and  customers'  ledger  accounts,  the  debit  balance  in  the  controlling 
account  would  not  agree  with  the  sum  of  the  balances  of  all  customers' 
accounts  in  the  customers'  ledger.  The  error  usually  is  found  to  have 
been  made  by  the  clerk  who  posts  the  detailed  items.  In  this  way  his 
work  is  said  to  be  controlled  by  the  summary,  or  "controlling"  account, 
hence  its  name. 

Advantages  of  Controlling  Accounts  Summarized.  The  advantages  of 
controlling  accounts  may  then  be  summed  up  as  follows: 

1.  Controlling  accounts  are  a  great  aid  in  finding  errors  in  a  trial 
balance. 

2.  They  reduce  the  work  of  preparing  a  trial  balance  by  shortening 
the  list  of  accounts. 

3.  If  the  general  ledger  is  in  balance,  financial  statements  can  be 
prepared  without  reference  to  the  personal  accounts. 

4.  Customers'  statements  of  accounts  can  be  made  out  and  sent  to 
customers  even  when  the  general  ledger  is  out  of  balance,  pro- 
vided the  controlling  account,  Accounts  Receivable,  total  agTees 
with  the  sum  of  the  customers'  balances. 

5.  Controlling  Accounts  make  possible  a  greater  division  of  labor. 
One  clerk  may  be  placed  in  charge  of  the  general  ledger,  another 
in  charge  of  the  customers'  ledger,  and  a  third  in  charge  of  the 
creditors'  ledger.  Thus  time  can  be  saved  and  a  greater  amount 
of  accuracy  secured. 

6.  The  work  of  subordinates  is  more  accurate  and  conscientious, 
since  they  know  it  must  agree  with  the  "control"  figure. 

Use  of  Other  Controlling  Accounts.  In  the  illustrative  work  of  this 
assignment  only  two  controlling  accounts  have  been  mentioned,  Accounts 
Receivable  and  Accounts  Payable. 

When,  however,  the  volume  and  the  nature  of  the  business  demand  it, 
other  controlling  accounts  may  be  used.  For  example,  you  might  have  a 
Raw  Materials  Account  for  various  kinds  of  materials  purchased  and  used 
in  the  factory,  Notes  Receivable  Account  for  numerous  notes  received  from 
customers,  and  Notes  Payable  Account  for  the  many  notes  given  to 
creditors.  The  Capital  Stock  Account  of  a  corporation  controls  a  stock 
ledger  which  contains  an  account  for  each  of  the  holders  of  capital  stock. 
A  controlling  account  may  also  be  set  up  for  investments  whenever  a  con- 
cern trades  heavily  in  investments. 

More  will  be  said  concerning  these  special  controlling  accounts  in  subse- 
quent assignments. 


Assignment  9,  Page  19 


THE  ESSENTIAL  POINTS  IN  THIS  ASSIGNMENT 

The  one  big  outstanding  principle  of  this  assignment  is  the  subdivision 
of  the  general  ledger  and  the  use  of  subsidiary  ledgers  for  purposes  of 
more  accurate  control. 

Customers'  accounts  are  taken  out  of  the  general  ledger  and  set  up  in 
a  separate  ledger.  Creditors'  accounts  also  are  set  apart  in  another  sub- 
sidiary ledger. 

Both  of  these  subsidiary  ledgers  are  controlled  by  representative  or 
controlling  accounts  in  the  general  ledger.  This  means  not  only  that  the 
totals  of  the  controlling  accounts  must  agree  with  the  sum  of  the  accounts 
in  the  subsidiary  ledger,  but  also  that  an  accurate  control  or  check-up  is 
possible  on  the  various  persons  who  are  in  charge  of  the  different  ledgers. 
Errors  can  be  more  easily  detected.  The  accounting  system  is  thus  made 
more  accurate,  which  is  especially  desirable  in  large  business  organiza- 
tions where  much  of  the  recording  must  be  done  by  persons  with  a  rather 
limited  accounting  knowledge. 

You  will  find  this  principle  of  subdividing  the  ledger  is  very  extensively 
applied  in  accounting  practice.  If  you  understand  the  principle  you  will 
have  no  difficulty  in  analyzing  some  systems  that  would  otherwise  seem 
complicated  and  full  of  details. 

In  the  problems  that  follow,  you  are  asked  to  apply  the  principle  of 
controlling  accounts  to  situations  taken  from  the  field  of  actual  business 
practice.    Send  in  solutions  for  all  these  problems. 


Assignment  9,  Page  20 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  9 

1.  The  King  Manufacturing  Company  uses  controlling  accounts  and  sub- 
sidiary ledgers  for  customers  and  creditors.  On  July  2,  1921,  it  makes 
a  sale  of  $515.75  to  the  Adams  Supply  Company,  terms  2/10  n/30. 

(a)  How  is  this  sale  recorded  on  the  books  of  original  entry  by 
the  King  Manufacturing  Company  ?  How  is  the  item  posted  ? 

(b)  On  July  18  the  Adams  Supply  Company  receives  a  credit 
memo,  which  allows  them  credit  for  $76.00,  on  account  of 
defective  goods.  How  is  this  transaction  entered  on  the 
books  of  the  King  Manufacturing  Company? 

(c)  On  August  27  the  Adams  Supply  Company  pays  the  balance 
of  this  bill.  What  entry  will  the  King  Manufacturing  Com- 
pany make  on  its  books  ? 

2.  The  following  accounts  have  been  taken  at  random  from  the  trial 
balance  of  the  Carroll  Manufacturing  Company.  You  should  under- 
stand that  this  is  only  a  partial  list.  After  examining  these  accounts 
you  are  asked  to  do  three  things: 

(a)  State  which  of  the  accounts  listed  could  be  controlled  by  the 
controlling  account,  "Accounts  Receivable."  What  is  the 
balance  that  will  appear  in  this  controlling  account? 

(b)  State  which  of  the  accounts  could  be  controlled  by  the  con- 
trolling account,  "Accounts  Payable."  What  is  the  balance 
that  would  appear  in  the  controlling  account? 

(c)  What  other  accounts  in  this  list  may  be  used  as  controlling 
accounts  ? 

Accounts  Debit         Credit 

H.  I.  Weaver $      500.00 

H.  J.  Franklin 400.00 

F.   E.   Bengert $  2,000.00 

Raw  materials  on  Hand  Dec.  31,  1920 8,750.00 

Raw  materials  Purchased  during  year 40,200.00 

H.  J.  Thompson 700.00 

Selling  Expenses 5,000.00 

L.  K.  White 800.00 

Notes  Receivable  2,500.00 

Notes  Payable  1,000.00 

Cost  of  Goods  Sold 75,000.00 

Capital  Stock  60,000.00 

A.  B.  Lewis 1,000.00 

.  H.  A.  Williams 400.00 

D.   E.   Reid 800.00 

D.  C.  Washington 1,000.00 

3.  Enter  the  following  transactions  in  the  cash  journal,  sales  journal, 
purchase  journal,  and  general  journal.  Use  the  general  journal  only 
for  those  transactions  that  cannot  be  entered  in  the  special  journals. 
Foot  and  rule  the  various  books  of  original  entry  except  the  journal. 
Post  the  details  to  the  subsidiary  ledgers,  customers'  ledger  and 
creditors'  ledger.  Post  the  totals  and  the  sundry  items  to  the  general 
ledger.  After  you  have  posted  all  of  the  items  in  the  general  and  sub- 
sidiary ledgers  prepare  a  trial  balance  of  the  general  ledger  and  make 
a  list  of  the  balances  in  each  of  the  subsidiary  ledgers ;  prove  the  net 
balance  of  the  subsidiary  ledgers  against  the  respective  controlling 
accounts. 

Assignment  9,  Page  21 


TRANSACTIONS 

June  1,    1921,  A.  H.  Stone  began  business  with  the  following  assets:    Cash, 
$10,000;  merchandise,  $20,000;  Furniture  and  Fixtures,  $2,000. 

2     Sold  merchandise  to  F.  R.  Jamison  on  account,  $400.00;  to  Angis 
McLean  on  account,  $360.00;  to  James  Axton  on  account,  $342.18. 

3  Bought  merchandise  on  account  from  Lane  &  Company,  $240.08; 
from  James  Cobb,  $748.19;  from  McKinney  Brothers,  $800.00. 

4  F.  R.  Jamison  returned  $57.00  worth  of  goods  and  paid  $100.00  on 
account.    Mr.  Stone  paid  out  $200.00  for  month's  rent  of  store  building. 

6  Paid  clerks'  salaries,  $240.00.  Received  $150.00  on  account  from  James 
Axton  and  $160.00  from  Angis  McLean. 

8  Returned  $98.00  worth  of  merchandise  to  James  Cobb  as  unsatisfactory. 
Gave  our  note  to  McKinney  Brothers  for  $500.00  and  cash  for  the  bal- 
ance of  the  bill  of  June  3. 

10  Received  from  James  Axton,  $50.00  cash. 

11  Received  a  promissory  note  from  Angis  McLean  on  account,  $200.00. 
Paid  James  Cobb  on  account,  $650.19. 

13     Gave  note  to  Lane  &  Company  for  $200.00,  to  apply  on  account.     Col- 
lected $50.00  from  James  Axton  to  apply  on  account. 

15  Borrowed  from  First  National  Bank,  $2,000.00  on  our  note. 

16  Bought  an  office  desk,  $74.00  cash. 

17  Collected  $200.00  from  F.  R.  Jamison. 

22     Paid  our  note  at  the  bank.     (Disregard  interest  cost.) 

24     Sold  merchandise  to  J.  C.  Block,  on  account,  $375.00. 

Purchased  merchandise  for  $425.50  from  Clinton  Curtis  on  account. 

30     Cash  sales  for  month,  $400.00. 

30    The  inventory  of  merchandise  amounted  to  $21,075.64. 

Send  in  to  the  University  the  following: 

(a)  Cash  journal,  sales  journal,  purchase  journal,  general  journal. 

(b)  Ledger  accounts  with  items  posted  from  books  of  original  entry. 

(c)  Trial  balance  before  closing. 

It  is  not  necessary  to  prepare  and  send  in  the  balance  sheet  and  the 
profit  and  loss  statement,  unless  you  so  desire.  These  two  statements  will 
be  included  in  the  practical  solution  which  will  be  sent  to  you  along  with 
your  written  work. 


Higher  Accountancy 

Ol  ID 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  10 
COLUMNIZATION 


TO  get  before  the  business  executive  the  exact  infor' 
mation  necessary  to  run  a  business — to  buy  ahead, 
extend  credits,  take  on  additional  Hnes,  expand  branches,  etc. 
— means  that  the  business  facts  that  accounting  must  gather 
and  present  should  be  accurately  recorded. 

The  balance  sheet,  the  profit  and  loss  statement,  or  the 
special  report  must  bring  this  information  before  the  execu- 
tive so  that  he  can  follow  his  business  with  unerring 
fingers  and  plan  and  figure  ahead. 

E.  F.  Dahm 

Associate  Educational  Director, 
LaSalle  Extension  University 

LaSalle  Extension  University 

Chicago 


NHA-IO 
(11-182) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold  faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — ^Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


COLUMNIZATION 

USE  OF  SPECIAL  COLUMNS  IN  BOOKS  OF  ORIGINAL  ENTRY 

Principle  of  Columnization.  Thus  far  in  our  course  we  have  used  the 
simplest  forms  for  the  various  books  of  original  entry.  The  journal  in 
Assignment  5,  the  cash  book  in  Assignment  7,  and  the  sales  and  purchase 
books  in  Assignment  8  were  presented  with  as  few  columns  as  possible. 
When  a  business  grows  large  enough,  these  simple  books  can  be  made  more 
useful  by  increasing  the  number  of  columns.  In  Assignment  9  we  applied 
for  the  first  time  what  may  be  called  the  "principle  of  columnization," 
which  simply  means  the  use  of  additional  columns  in  which  like  items  are 
set  apart  and  summarized  so  that  totals  can  be  posted,  often  with  a  valu- 
able saving  of  time. 

For  example,  in  the  cash  book  of  Assignment  9  two  special  columns 
were  added,  one  on  the  receipts  side  for  cash  received  from  customers,  and 
the  other  on  the  disbursements  side  for  cash  paid  to  creditors.  The  totals 
of  these  columns  were  then  posted  to  the  controlling  accounts. 

In  the  present  assignment,  therefore,  you  will  find  that  you  are  already 
somewhat  familiar  with  the  principle  and  the  advantages  of  adding  special 
columns  in  books  of  original  entry.  Apply  this  same  principle  as  you 
proceed  with  this  assignment.  You  will  thus  come  to  learn  more  easily 
and  quickly  how  the  pages  of  the  journal,  cash  book,  sales  book,  and  pur- 
chase book  can  be  ruled  so  as  to  provide  the  additional  columns  necessary 
to  efficiently  record  the  large  volume  of  detail  found  in  large  businesses. 

Designing  the  Simple  Journal.  Accountants  are  frequently  called  upon 
to  design  record  forms  for  small  concerns,  where  usually  only  one  book  of 
original  entry — the  journal — is  used,  and  where  all  the  accounting  work 
is  done  by  one  person.  The  simple  journal  with  its  two  columns,  as  shown 
in  Figure  1,  would  be  adequate  as  long  as  the  number  of  transactions  re- 
mains small. 

When,  however,  this  number  grows  larger,  then  it  is  desirable  to  pro- 
vide additional  columns  in  the  journal,  so  that  the  one  bookkeeper  can 
accomplish  more  work  in  the  same  amount  of  time.  Figure  1  shows  the 
two  columns. 

How  Time  Can  Be  Saved.  The  most  logical  place  to  save  time  is  where 
the  transactions  are  first  recorded,  that  is,  in  the  journal.  In  other  words, 
provide  special  columns  so  that  like  items  can  be  classified  and  grouped  at 
the  time  the  entries  are  made.  After  we  have  added  the  special  columns, 
VvC  have  a  "columnar  journal." 

The  Columnar  Journal.  This  columnar  journal  does  not  in  any  way 
affect  the  twofold  entry  that  is  made  in  the  simple  journal.  You  still  have 
the  debit  and  credit  elements  for  each  transaction,  only  instead  of  placing 
all  the  debits  in  one  column  and  all  the  credits  in  another,  you  classify  the 
debits  in  several  columns,  and  the  credits  in  several  columns.  Each  trans- 
action as  you  see  in  Figure  2  is  analyzed  into  its  debit  and  credit  elements 
just  as  was  the  case  in  the  simple  journal. 


JOURNAL 


Date 

L.F. 

Explanation 

Debits 

Credits 

1922 
May 

7 

Cash 
Sales 
Total  for  day 

175 

00 

175 

00 

7 

Purchases 
Cash 
Merchandise  from  A.  B.  C.  Co. 

215 

00 

215 

00 

8 

Rent 
Cash 
Rent  of  store  for  month 

52 

50 

52 

50 

8 

Cash 
Sales 
Total  for  day 

317 

50 

317 

50 

8 

John  Carmichael  Accounts  Receivable 
Sales 
Merchandise  on  account 

39 

00 

39 

00 

8 

Cash 
Sales 
Total  for  day 

135 

10 

135 

10 

9 

Expense 
Cash 
Paid  Gas  Bill 

13 

75 

13 

75 

10 

Purchases 
Cash 
Merchandise  from  Nelson  Bros. 

200 

00 

200 

00 

10 

Cash 
Interest  Earned 
Interest  on  Notes  Receivable 

15 

00 

15 

00 

The  Simple  Joubnal 
Figure  1.  This  simple  journal  has  one  column  for  debits  and  another  for  credits.  When 
you  post  these  entries  to  the  ledger,  you  will  have  to  make  two  postings,  debit  and 
credit,  for  each  transaction;  eighteen  postings  for  nine  transactions.  Look  over  the 
explanation  column  and  you  will  note  that  cash  is  debited  four  times  and  credited  four 
times.  Sales  is  also  credited  four  times.  If  all  the  cash  debits  could  be  placed  to- 
gether in  one  column,  all  the  cash  credits  in  another,  and  the  sales  credits  in  still  an- 
other, and  so  on,  then  these  separate  postings  could  be  avoided.  Instead,  totals  could 
be  posted  at  the  end  of  the  period,  and  much  time  could  be  saved  as  explained  in  the 

discussion. 

Posting  Totals  from  Columnar  Journal.  The  Purchases  Account  can 
now  be  debited  with  the  total  amount  of  purchases ;  the  Cash  Account  will 
receive  the  total  debits  and  the  total  credits  instead  of  several  detailed 
amounts ;  and  the  Sales  Account  will  receive  the  total  amount  of  sales.  The 
amounts  in  the  general  ledger  columns  would  of  course  be  posted  in  the 
regular  way,  item  by  item,  to  the  general  ledger. 

When  Postings  Are  Made.  The  totals  may  be  posted  daily  or  weekly, 
or  just  as  soon  as  a  page  is  filled  up  the  special  column  may  be  footed  and 
the  totals  posted,  instead  of  carrying  them  forward  to  a  new  page.  The 
'•general  ledger"  columns  will  not  be  totaled  nor  carried  forward  to  a  new 


Assignment  10,  Page  2 


page,  because  the  items  entered  in  these  columns  are  to  be  posted  to  several 
different  accounts,  and  the  total  will  not  represent  anything. 

Multicolumnar  Journal.  In  some  small  businesses,  where  numerous 
transactions  of  a  similar  type  occur,  it  is  desirable  to  use  the  multicolumnar 
journal  reproduced  in  Figure  3,  which  contains  still  more  columns  than 
Figure  2,  but  in  a  slightly  different  arrangement.  The  number  of  columns, 
of  course,  will  depend  upon  the  number  of  types  of  transactions  which 
recur  frequently. 

COLUMNAR  JOURNAL 


Gen- 
eral 
Ledger 
Debits 

Pur- 
chases 
Debits 

Cash 
Debits 

Date 

L.  F. 

Explanation 

Cash 
Cred- 
its 

Sales 
Cred- 
its 

Gen- 
eral 
Led- 
ger 
Cred- 
its 

175 

00 

May  7 

Cash 
Sales 
Total  for  day 

175 

00 

215 

00 

7 

Purchases 
Cash 
Mdse.  from  A. B.C.  Co. 

215 

00 

52 

50 

317 

50 

8 
8 

Rent 
Cash 
Rent  store  for  month 

Cash 
Sales 
Total  for  day 

52 

50 

317 

50 

39 

00 

135 

10 

8 
9 

John  Carmichael 
Accts.  Rec. 
Sales 
Mdse.  on  Acct. 

Cash 
Sales 
Total  for  day 

39 
135 

00 
10 

13 

75 

200 

00 

15 

00 

9 

10 
10 

Expense 
Cash 
Pd.  monthly  Gas  Bill 

Purchases 
Cash 
Mdse.  from  Wilson  Bros 

Cash 
Interest  Earned 

Interest  on  notes  rec. 

13 
200 

75 
00 

15 

00 

The  Columnar  Journal 
Figure  2.  This  columnar  journal  contains  the  same  transactions  as  Figure  1.  The 
difference  is  that  we  have  used  additional  columns;  one  for  cash  debits,  another  for 
cash  credits,  one  for  purchases,  another  for  sales,  and  two  columns  for  miscellaneous 
items,  one  for  the  debits,  another  for  the  credits.  These  columns  make  it  possible  to 
segregate  the  debits  and  credits  so  that  time  will  be  saved  in  posting  and  the  chances 

for  error  will  be  less. 


Assignment  10,  Page  3 


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Assignment  10,  Page  4 


Number  of  Columns  to  Use.  The  number  of  columns  depends  upon  the 
needs  of  your  particular  business.  This  general  principle  or  rule  should 
govern  the  choice  of  columns,  namely:  Economy  may  be  secured  by  the 
use  of  special  columns  ONLY  when  a  given  type  of  entry  is  repeated  sev- 
eral times  in  the  same  period.  Clearly,  the  columns  used  in  a  columnar 
journal  will  vary  with  different  businesses;  you  will,  therefore,  understand 
that  a  journal  as  illustrated  in  Figure  3  by  no  means  fits  every  business. 
It  will  also  be  well  to  bear  in  mind  that  the  columnar  journal  has  certain 
limitations. 

Limitations  of  Multicolumnar  Journal.  The  number  of  Columns  is  nat- 
urally limited  by  the  size  of  the  page.  There  are  in  use  columnar  journals 
with  pages  as  wide  as  18  inches.  The  page  however,  cannot  extend  in- 
definitely to  the  right  or  left,  nor  can  there  be  inserted  an  indefinite  num- 
ber of  short  pages.  Too  many  columns  would  mean  waste  of  space  and 
counteract  the  economy  of  total  posting.  The  more  columns  you  have  the 
more  difficult  it  is  to  enter  amounts  in  the  correct  column  and  line,  and 
hence,  the  greater  is  the  chance  of  error. 

The  usefulness  of  the  columnar  journal  is  limited  to  such  businesses 
in  which  there  is  not  yet  sufficient  accounting  to  require  more  than  one 
clerk.  The  multicolumnar  book  makes  it  unnecessary  to  split  up  the  ac- 
counting record,  but  this  is  true  only  up  to  a  certain  point.  As  soon  as  the 
business  grows  large  enough,  subdivision  must  come.  The  multicolumnar 
journal,  is,  therefore,  but  a  temporary  economy,  and  one,  very  likely,  fitted 
to  none  but  the  small  business. 

Special  Journals  Outgrowth  of  Columnar  Journal.  This  columnar  jour- 
nal, with  its  numerous  columns,  one  for  Cash,  another  for  Accounts  Re- 
ceivable, another  for  Accounts  Payable,  etc.,  may  prove  inadequate  for  a 
growing  business,  but  it  is  suggestive  of  what  can  be  done  in  the  develop- 
ment of  special  journals  when  the  volume  of  business  demands  it.  The 
cash  book  for  example  is,  in  fact,  nothing  more  than  the  cash  column — 
debit  and  credit — taken  out  of  the  columnar  journal  and  set  off  in  a  separate 
book.  The  sales  book  is  merely  the  sales  column  taken  out,  and  the  pur- 
chase book  is  the  purchase  column  set  apart.  In  other  words,  the  principle 
of  columnization,  developed  in  the  columnar  journal,  has  shown  the  way 
for  the  development  of  special  books  of  original  entry.  Instead  of  entering 
transactions  in  separate  columns  of  one  book,  it  is  the  most  modern  prac- 
tice now,  especially  among  the  larger  business  concerns,  to  enter  them  in 
separate  books,  as  explained  in  Assignments  7  and  8. 

Additional  Columnization  Required.  There  are  many  businesses  that 
outgrow  even  the  simple  cash  book,  sales  book,  and  purchase  book.  Under 
such  conditions,  the  special  journals  are  enlarged  by  adding  special  columns, 
just  as  the  journal  itself  was  expanded.  The  principle  of  columnization  is 
thus  extended  from  the  journal  to  the  special  journals.  For  example,  the 
following  conditions  may  exist. 

1.  Your  customers'  accounts  may  run  up  into  the  thousands,  and  must  therefore 
be  classified  into  three,  four,  or  more,  subsidiary  ledgers,  with  an  equal  number  of 
controlling  accounts  so  that  the  work  of  keeping  these  ledgers  can  be  distributed  among 
several  clerks.  In  order  to  obtain  the  totals  for  the  several  controlling  accounts,  addi- 
tional columns  are  introduced  in  the  sales  book,  purchase  book,  and  cash  book. 

2.  Further,  suppose  that  the  business  in  which  you  are  employed  has  three  separate 
departments  selling  merchandise.  The  sales  manager  or  proprietor  will  want  to  know 
the  total  sales  of  each  department  for  purposes  of  comparison  by  departments  and 

Assignment  10,  Page  5 


one  period  with  another.  In  order  to  determine  the  amount  of  sales  for  each  depart- 
ment, it  is  advisable  to  have  separate  columns  in  the  sales  book  for  departments.  Thus, 
at  the  end  of  the  period,  the  total  sales  for  each  can  be  easily  determined  by  adding 
up  the  items  in  that  column. 

3.  Assume  that  each  department  buys  its  own  merchandise.  The  buyers  of  the 
several  departments  are  responsible  to  the  general  manager  or  the  purchasing  agent. 
As  a  result,  he  will  want  a  complete  record  of  the  purchases  for  each  department  for 
the  purpose  of  comparison.  This  can  usually  be  easily  obtained  by  providing  a  separate 
column  for  each  in  the  purchase  book. 

4.  You  may  allow  customers  a  cash  discount  for  prompt  payment,  say  2  per  cent 
in  10  days;  you  will  then  find  it  advantageous  to  use  special  columns  in  the  cash  book  for 
these  discounts.  On  the  "Receipts"  side  is  provided  a  special  column  headed  "Sales 
Discounts  Debit"  and  on  the  "Disbursements"  side  there  is  one  headed  "Purchase  Dis- 
counts Credit."  Thus,  the  total  discounts  taken  and  allowed  for  any  period  can  be 
easily  determined  and  compared  with  discounts  for  previous  periods.  The  sales  man- 
ager and  the  purchasing  agent  must  have  this  information,  so  that  they  can  determine 
intelligently  future  policies  of  taking  and  allowing  discounts.  The  discount  columns 
of  the  cash  book  will  also  save  time  in  posting.  The  totals  are  posted  instead  of  each 
item  separately. 

5.  If  cash  sales  and  cash  purchases  are  made  daily  it  would  be  advisable  to  pro- 
vide a  special  column  for  cash  sales  on  the  debit  side  of  the  cash  book,  and  another 
column  on  the  credit  side  for  all  cash  purchases.  Thus  the  total  trading  on  credit  can 
be  frequently  compared  with  the  total  cash  business.  Moreover,  time  can  be  saved 
in  posting  totals  from  these  columns,  and  ledger  space  is  also  saved  by  having  only 
totals  in  the  accounts. 

6.  When  a  business  has  numerous  expense  items,  time  can  be  saved  in  posting 
by  using  one  or  more  special  columns  for  these  expenses  in  the  cash  book,  disburse- 
ments side.  At  the  end  of  the  month,  or  week,  whenever  the  books  are  closed,  the  total 
can  be  posted  to  the  Expense  Account. 

7.  Some  concerns  maintain  checking  accounts  with  more  than  one  bank.  In  such 
cases,  a  separate  column  can  be  set  up  in  the  cash  book  for  each  bank.  In  this  way 
a  more  careful  check  can  be  maintained  on  the  bank  transactions. 

Basic  Principle  of  Columnization.  We  might  continue  to  cite  still  other 
business  conditions  that  would  require  columnization.  Those  given,  how- 
ever, are  sufficient  to  illustrate  the  basic  principle  of  columnization,  and  its 
application  to  specific  conditions.  It  is  a  principle  that  can  be  applied 
extensively  in  accounting  practice,  because  it  serves  two  very  important 
purposes : 

1.  To  provide  quickly  necessary  information  for  the  proprietor  or  de- 
partment managers,  to  be  used  in  a  more  intelligent  control  of  the 
business. 

2.  To  save  time  by  the  posting  of  totals  instead  of  numerous  detail 
items. 

Designing  Special  Journals.  The  first  thing  to  do,  therefore,  in  build- 
ing up  accounting  records  is  to  consider  conditions  like  those  we  have  men- 
tioned above.  See  first  of  all  what  is  needed.  Since  every  business  has 
its  own  needs  and  peculiar  conditions,  the  accountant  must  first  study  the 
conditions  as  they  actually  exist.  Then  he  can  design  his  books  to  meet 
those  conditions  effectively. 

Additional  Columns  in  Sales  Book.  For  purpose  of  illustration  take  the 
situation  described  above,  under  1  and  2  on  page  5.  Customers'  ac- 
counts are  to  be  classified  alphabetically,  and  there  are  three  selling  de- 
partments. A  sales  book  designed  to  meet  the  requirements  of  such  a 
business  would  appear  thus : 

Assignment  10,  Page  6 


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Assignment  10,  Page  7 


The  total  of  eacn  debit  column  is  posted  to  the  proper  controlling  ac- 
count. The  debit  totals  can  be  summarized,  likewise  the  credit  totals,  so 
that  the  equality  of  debits  and  credits  in  this  book  may  be  tested  before 
the  totals  are  posted.  The  names  of  the  controlling  accounts  and  of  the 
departmental  sales  accounts  are  indicated  in  the  column  headings.  Post- 
ing to  the  individual  accounts  in  the  four  subsidiary  ledgers  is  the  same  as 
when  only  one  subsidiary  ledger  is  used. 

Purchase  Book  with  Department  Columns.  The  design  of  the  purchase 
book  is  usually  simpler  than  that  of  the  sales  book.  Provision  must  be 
made  for  the  several  departments,  if  such  be  included  in  the  plan  of  the 
business,  but  it  is  exceptional  to  find  conditions  requiring  several  separate 
creditors'  ledgers  and  separate  controlling  accounts.  In  most  enterprises 
there  are  fewer  creditors  than  customers,  because  commodities  are  bought 
in  large  quantities  and  then  distributed  in  smaller  parcels. 

In  the  purchase  book  illustrated  in  Figure  5,  there  is  provision  for 
only  one  Accounts  Payable  Controlling  Account,  but  additional  columns  are 
shown  for  the  three  departments,  as  in  the  sales  book. 


COLUMNAR  PURCHASE  BOOK 

Date 

L.F. 

Name 

Terms 

Due 
Date 

Merchandise  Purchases 
Debit 

Accounts 

Payable 

Credits 

Dept,  A. 

Dept.  B. 

Dept.  C. 

1922 

July  1 
12 
19 
31 

31 

87 
86 
89 
88 

To 

Hudson  Co. 
Brown  &  Co. 
Randall  &  Co. 
W.  Mill  &  Co. 

tal  Dr.   Purcha 

2/10-N/30 
N/30 

2/10-N/30 
N/30 

ses--Cr.  Acco 

July  11 
Aug.  11 
July  30 
Aug.  30 

unts  Paya 

853 
150 

00 
00 

1,345 

00 

576 

15 

1,003 
ble 

00 

1,345 

00 

576 

15 

Si 

2,924 

15 

The  Columnar  Purchase  Book 
Figure  5.  This  columnar  purchase  book  has  three  debit  columns,  one  for  each  depart- 
ment. The  items  are  distributed  to  these  columns,  according  to  the  kinds  of  goods 
purchased.  If  Dept,  A.  makes  the  purchase,  the  item  is  entered  in  column  Dept.  A., 
etc.  One  column  is  provided  for  the  total  credit  to  Accounts  Payable  Account.  At  the 
end  of  the  period  each  of  the  debit  totals  is  posted  to  the  proper  departmental  Pur- 
chase Account,  and  the  entire  amount  is  credited  to  Accounts  Payable.  During  the 
month  each  item  is  posted  separately  to  the  personal  account  in  the  creditors'  ledger. 

"Due  Date"  Column.  One  column  in  this  purchase  book  is  to  be  noted 
especially,  for  it  has  not  appeared  before,  and  it  serves  an  important  ad- 
ministrative function.  We  refer  to  the  column  headed  "Due  Date."  In 
this  column  should  be  entered  the  latest  date  upon  which  payment  may  be 
made,  and  still  secure  the  cash  discount.  The  due  date  is  determined  by 
considering  the  date  shown  in  the  first  column,  and  the  facts  recorded  in 
the  "Terms"  column.    Because  of  this  use  of  the  facts,  the  date  shown  in 


Assignment  10,  Page  8 


the  first  column  should  be  the  date  of  the  invoice  rather  than  the  date  the 
entry  is  made.  The  date  of  entry,  if  recorded  at  all,  will  be  shown  in  a 
separate  column. 

By  thus  recording  the  due  date  at  the  time  of  entry,  it  is  possible  for 
the  proprietor  or  other  person  in  charge  to  survey  the  purchase  book 
quickly,  and  note  those  invoices  which  must  be  paid  at  once  in  order  to 
take  advantage  of  the  cash  discount  allowed. 

Columnar  Cash  Book.  The  simple  cash  book  illustrated  in  Assignment 
9  had  only  one  column  for  Accounts  Receivable,  since  the  customers'  ac- 
counts were  few  in  number  and  could,  therefore,  be  kept  in  one  subsidiary 
ledger,  which  was  controlled  by  one  summary  account  in  the  general  ledger. 


COLUMNAR  CASH  BOOK  (Receipts  Side) 

Date 

L. 
F. 

Account 
Credited 

Explanation 

General 

Ledger 

Cr. 

Accounts  Receivable 
Credit 

Net 
Cash 

Total 

A-D 

E-K 

L-R 

S-Z 

CoLUMNAK  Cash  Book 
Figure  6.    Cash  that  is  received  from  customers  is  recorded  in  one  of  the  four  credit 
columns.    If  the  customer's  name  begins  with  C,  for  example,  the  amount  is  placed  in 
the  column  headed  A-D;  if  the  name  begins  with  N,  the  amount  is  placed  in  the  column 
headed  L-R,  etc.     All  cash  from  other  sources  is  recorded  in  the   General  Ledger 

Credits  column. 

This  simple  cash  book,  however,  can  take  on  additional  columns,  whenever 
the  business  expands  and  customers  become  more  numerous.  Assume,  for 
purpose  of  illustration,  that  you  are  asked  to  design  a  cash  book  which 
will  meet  the  needs  of  the  following  cases : 

Case  1.  Customers'  accounts  are  too  numerous  for  one  ledger.  They  are  dis- 
tributed alphabetically  into  four  subsidiary  ledgers,  with  four  separate  controlling 
accounts.    Your  cash  book  may  then  be  set  up  in  the  form  as  shown  in  Figure  6. 

The  credits  to  the  four  controlling  accounts  for  cash  received  from  customers  will 
be  posted  from  the  totals  of  the  four  special  columns  headed  "A-D,"  "E-K,"  "L-R," 
and  "S-Z;"  the  credits  to  the  personal  accounts  in  each  of  the  four  subsidiary  ledgers 
will  be  posted  from  each  of  these  columns,  item  by  item,  in  the  same  manner  as  if 
there  were  but  one  column. 

(Continued  on  Page  12) 

Assignment  10,  Page  9 


COLUMNAR  CASH  BOOK  (Receipts) 


Date 

L. 
F. 

Account 
Credited 

Explanation 

General 

Ledger 

Cr. 

Accounts 
Rec. 
Cr. 

Sales 

Discounts 

Dr. 

Sales 
Cr. 

Net 

Cash 

Received 

Total 

1922 
June 

1 

2 
2 

Balance 

Sales 

Interest 

For  day 
Brown  &  Jones 

$14 

60 

$500 

00 

$500 
14 

00 
60 

$5,000 

00 

6 
7 
8 

Chas.  Smith 
Edw.  Jones 
Jas.  Evans 

On  account 
(less  discount) 
On  account 
(less  discount) 
In  full  of  acct. 

$100 

60 

115 

00 
00 
00 

$2 

1 

00 
20 

98 

58 

115 

00 
80 
00 

14 
15 

Western  Mfg.   Co. 
Sales 

On  Account 
(less  discount) 
For  day 

152 

00 

3 

04 

121 

15 

148 

121 

96 
15 

19 

Carson  Bros. 

In  full  of  acct. 

100 

00 

100 

00 

24 

Notes  received 

Brown  &  Jones 

200 

00 

200 

00 

30 

Sales 

For  day 

306 

12 

306 

12 

July 

30 

1 

Ross  &  Co. 
General  Ledger  Cre 
Total--Accounts  Re 
Total--Sales  Disco 
Total--Sales  Cr. . . 

dits 

1,000 

00 

20 

00 

980 

00 

$2,642 

63 

$214 

60 

c.   Cr 

$1,527 

00 

unts  Dr 

$26 

24 

$927 

27 

Total--Cash  Receiv 

ed  Dr 

$2,642 

63 

$7,642 

63 

$3,911 

80 

_ 

_ 

Columnar  Cash  Book 

Figure  7.  This  cash  book  is  expanded  still  further  than  Figure  6.  Look  first  at  the 
receipts  side.  All  cash  sales  are  entered  in  the  Sales  Column,  and  extended  in  the  Net 
Cash  Column.  Whenever  a  customer  pays  on  account  and  is  allowed  a  discount,  the 
full  amount  of  his  bill  is  entered  in  the  Accounts  Receivable  Column,  the  discount 
allowed  is  entered  in  the  Sales  Discount  Column,  and  the  net  cash  received  in  the  Net 
Cash  Column.     Money  received  from  other  sources  is  recorded  in  the  General  Ledger 


Assignment  10,  Page  10 


COLUMNAR  CASH  BOOK  (Disbursements) 


Date 

L. 
F. 

Account 
Debited 

Explanation 

General 

Ledger 

Dr. 

Accounts 

Payable 

Dr. 

Purchase 

Disc. 

Cr. 

Expenses 
Dr. 

Net 
Cash 

Total 

1922 

2 

Expense 

Rent  for  Jan. 

$100 

00 

$100 

00 

June 

3 

Furniture  &  Fix. 

Desk  and  chairs 

$87 

50 

87 

50 

5 
6 

F.  R.   Larson 
Hudson-Smith 

To  apply  on  acct. 

(less  discount) 

In  full  of  acct. 

$200 
1,345 

00 
00 

$20 

00 

180 
1,345 

00 
00 

7 
8 

Randall  &  Co. 
Cartage 

On  account 
(less  discount) 
On  freight  inward 

1,576 

00 

31 

52 

25 

00 

1,544 
25 

48 
00 

9 

Wages 

For  2  weeks 

120 

00 

120 

00 

14 

Interest  Cost 

On  note  24 

12 

00 

12 

00 

24 

L.   S.   Dancey 

62 

15 

1 

24 

60 

91 

30 
30 

Wilbur  Bros. 

General  Ledger  Deb 
Total--Accounts  Pa 
Total--Purchase  Di 
Total--Expenses  Dr 
Total--Cash  disbur 
Balance  on  hand. . . 

its 

261 

16 

5 

22 

255 

94 
83 

$3,730 
$3,911 

$7,642 

83 
80 

63 

$87 

50 

yable  Dr 

$3,444 

31 

scounts  Cr 

$57 

98 

$257 

00 

sed  Cr 

$3,730 

Column  and  extended  to  the  Net  Cash  Column.  Turn  to  the  Disbursements  side  of  the 
cash  book.  All  expenses  are  entered  in  the  Expense  Column.  When  we  pay  a  creditor, 
and  take  a  discount,  we  enter  the  full  amount  of  our  bill  in  the  Accounts  Payable 
Account,  the  discount  in  the  Purchase  Discount  column,  and  the  net  cash  paid  out  in 
the  Net  Cash  Column.  Money  paid  out  for  other  purposes,  such  as  the  purchase  of  a 
desk  and  chairs,  is  entered  in  the  General  Ledger  Column.  The  net  cash  paid  out  for 
each   transaction  is  entered  in  the  Net   Cash   Column. 


Assignment  10,  J*age  11 


Case  2.  All  the  customers'  accounts  are  kept  in  one  subsidiary  ledger.  The  busi- 
ness makes  a  practice  of  allowing  cash  discounts  to  customers  for  prompt  payment.  It 
also  takes  advantage  of  discounts  allowed  by  creditors.  The  proprietor  desires  to  know 
the  total  discount  taken  and  allowed.  He  also  wishes  to  compare  cash  sales  with  the 
total  sales  on  account.  Provision  should  also  be  made  to  post  the  expense  items  in 
total.  The  cash  book  which  you  might  design  to  fit  such  a  case  would  have  special 
columns  for  the  discounts,  one  column  for  cash  sales  on  the  receipts  side  and  a  special 
column  for  expense  on  the  disbursements  side,  as  shown  in  Figure  7. 

Ruling  and  Balancing  Columnar  Cash  Book.  At  the  end  of  the  period 
the  cash  book  is  closed  and  balanced.  Each  column  is  totaled,  and  the 
balance  is  determined  in  the  same  way  as  the  balance  of  a  Cash  Account. 
In  other  words,  the  balance  on  hand  at  the  beginning  of  the  period,  plus 
the  total  cash  received  during  the  period,  minus  the  cash  paid  out,  will 
be  the  balance  of  cash  on  hand  at  the  end  of  the  period.  This  balance 
should  agree  with  the  actual  cash  on  hand  and  in  the  bank. 

Method  of  Posting  Columnar  Cash  Book.  This  cash  book  is  posted  in 
the  same  way  as  the  cash  book  of  Assignment  9.  The  debits  and  credits 
are  indicated  at  the  bottom  of  the  cash  book  on  both  sides. 


CASH  RECEIPTS  SIDE 

1.  To  the  General  Ledger 

The  items  posted  to  the  general  ledger  are: 

Total  cash  receipts  debited  to  Cash  Account $2,642.63 

Total  sales  discounts  debited  to  Sales  Discount  Account       26.24 

Total  credit  to  Accounts  Receivable  Account $1,527.00 

Total  credited  to  Sales  Account „ 927.27 

Individual  credits  from  general  ledger  Credits 
Column: 

Interest   earned _ 14.60 

Notes  receivable  200.00 

2.  To  the  Subsidiary  Ledger  (Customers) 

Each  item  in  the  "Accounts  Receivable"  column  is  credited  to  the  proper 
personal  account  in  the  customers'  ledger. 

Credits: 

Charles  Smith_ $  100.00 

Edward  Jones 60.00 

James    Evans 115.00 

Western  Manufacturing  Co 152.00 

Carson   Bros 100.00 

Ross  &   Company - 1,000.00 


CASH  DISBURSEMENTS  SIDE 

1.    To  the  General  Ledger 

Total  debited  to  Accounts  Payable  Account $3,444.31 

Total  debited  to  Expense  Account 257.00 

Separate  item  from  general  ledger  Debits  Column  to 

Furniture  &  Fixture  Account _ 87.50 

Total  credited  to  Cash  Account $3,730.83 

Total  credited  to  Purchase  Discounts  Account....  57.98 

Assignment  10,  Page  12 


2.     To  the  Subsidiary  Ledger  (Creditors) 
Each  item  in  the  Accounts  Payable  Column  is  debited  to  the  proper  per- 
sonal account  in  the  creditors'  ledger. 

Debits : 

F.    R.    Larson $    200.00 

Hudson-Smith    1,345.00 

Randall  &  Co 1,576.00 

L.  S.  Dancey _ 62.15 

Wilbur  Bros 261.16 

Advantages  of  Special  Columns  in  Cash  Book.  First,  of  all,  much 
time  is  saved  in  the  posting  of  totals  from  the  special  columns  of  the  cash 
book,  for  sales  discounts,  purchase  discounts,  cash  sales,  and  expenses. 
This  is  obvious  from  the  numerous  postings  of  totals  explained  above. 

Another  important  advantage  is  that  these  columns  serve  to  collect 
information  that  is  important  and  essential  to  the  management  in  deter- 
mining future  policies  of  a  business.  The  officers  in  charge  of  a  business 
may  want  to  know  the  amount  of  discounts  allowed  to  customers  or  the 
amount  of  discounts  taken  with  creditors  up  to  a  certain  date.  Since  the 
details  have  been  properly  grouped  in  special  columns,  it  is  an  easy  matter 
to  determine  the  totals  whenever  this  information  is  desired.  The  same 
is  true  when  the  total  amount  of  cash  sales  is  desired,  or  when  the  amount 
of  expenses  is  requested.  Business  men  always  favor  accounting  systems 
that  will  produce  accurate  figures  quickly.  Such  figures  are  made  avail- 
able by  the  use  of  additional  columns  in  the  cash  book  and  other  books  of 
original  entry,  as  illustrated  in  this  assignment.  The  principle  of  colum- 
nization  is,  therefore,  of  great  importance  in  accounting  practice,  not  only 
because  it  saves  time  in  keeping  accurate  records,  but  because  it  meets 
the  needs  of  business,  and  supplies  those  in  control  with  information  that 
may  be  required  any  time  during  the  accounting  period. 

Other  Methods  of  Handling  Cash  Discounts.  Some  objection  has  been 
raised  to  handling  the  sales  and  purchase  discounts  thru  the  cash  book 
on  the  theory  that  since  they  do  not  represent  actual  cash  received  and 
cash  disbursed,  they  should  not  be  entered  in  the  cash  book,  which  should 
contain  only  cash  receipts  and  disbursements.  Some  argue  that  these  dis- 
counts should  be  entered  in  the  general  journal. 

Journal  Entries  for  Discounts.  For  example,  when  Charles  Smith  pays 
his  bill  of  $100.00  on  June  6,  he  is  allowed  $2.00  discount.  The  net  cash 
received  is  $98.00.  The  $98.00  would  be  entered  in  the  cash  book  left 
side,  in  the  Accounts  Receivable  Account  column,  and  posted  in  the  total 
along  with  the  other  items  to  the  Controlling  Account  and  also  as  a  credit 
to  Charles  Smith's  account  in  the  customers'  ledger.  As  his  account  now 
stands,  however,  Smith  still  owes  us  $2.00,  for  his  account  has  a  debit  of 
$100.00  and  a  credit  of  $98.00.  A  journal  entry  must  then  be  made  to 
show  the  discount  of  $2.00. 

June  6 — Sales  Discounts $2.00 

Accounts   Receivable    (Controlling)..  $2.00 

Charles  Smith  (Subsidiary) 

Obviously,  much  time  would  be  consumed  in  making  many  such  entries 
for  discounts.    Furthermore,  the  transaction  is  split  up,  part  of  it  being 

Assignment  10,  Page  13 


in  the  cash  book  and  part  in  the  journal.  As  a  result,  it  is  inconvenient, 
and  practically  impossible  to  compare  the  cash  amount  received  from  each 
customer  and  recorded  in  the  cash  book  with  the  discount  recorded  in  the 
journal.  This  disadvantage  is  eliminated  by  using  special  columns  in  the 
cash  book. 

Discounts  Recorded  as  Receipts  and  Disbursements.  Another  way, 
used  by  some  accountants,  is  to  enter  on  the  "Receipts"  side  of  the  book 
the  full  amount  of  the  bill,  $100.00,  as  if  that  amount  were  actually  re- 
ceived; then  enter  the  $2.00  discount  on  the  "Disbursements"  side  as  if 
$2.00  had  been  paid  back  in  cash  to  Smith.  The  effect  of  these  two  entries 
when  posted  would  be  to  bring  a  debit  to  cash  of  $100.00  from  the  cash 
receipts  and  a  credit  to  Smith  of  $100.00;  and  to  bring  a  debit  to  Sales 
Discount  of  $2.00  and  a  credit  to  Cash  of  $2.00  from  the  cash  disburse- 
ments.   The  net  result  will  be  correct. 

But  this  causes  the  cash  book  to  express  $100.00  as  received,  when,  as 
a  matter  of  fact  Smith  sent  only  $98.00,  which  is  a  misstatement  of  fact. 
No  accountant  who  takes  pride  in  his  work  wishes  his  books  even  to  appear 
to  contain  untrue  statements.  So  it  is  natural  to  find  the  modern  prac- 
tice leaning  toward  the  use  of  special  columns  in  the  cash  book  for  these 
cash  discounts. 


MAIN  POINTS  OF  ASSIGNMENT  10 

Before  you  attempt  to  solve  the  problems  of  this  assignment  be  sure 
that  you  understand  thoroly  the  following  main  points  which  have  been 
brought  out  in  the  discussion. 

Columnization  means  the  use  of  additional  columns  in  books  of  original 
entry. 

Columns  may  be  added  to  the  simple  journal  when  a  small  business 
begins  to  grow.  In  this  way  totals  are  posted  instead  of  numerous  separate 
items,  and  time  is  saved. 

Out  of  the  columnar  journal  special  journals  are  developed — such  as 
the  cash,  sales,  and  purchase  journals. 

As  the  nature  and  size  of  a  business  develops,  these  special  journals 
are  expanded  further  by  adding  still  other  columns;  for  example,  columns 
for  departments,  for  various  subsidiary  ledgers,  and  for  cash  discounts. 

As  you  take  up  later  assignments  you  will  find  that  this  principle  of 
columnization  is  applied  quite  extensively  in  accounting  practice.  It  is  of 
great  importance,  and  for  this  reason  should  be  thoroly  mastered. 


Assignment  10,  Page  14 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  10 

The  following  problems  are  submitted  to  you  for  careful  study  and 
solution.  Problem  2  is  optional  and  all  other  problems  are  to  be  worked 
out  and  sent  in.  Use  ruled  paper  in  setting  up  the  solutions.  Give  special 
attention  to  the  forms  required.  The  neatness  and  accuracy  of  your  paper 
will  be  considered  by  your  instructor  in  grading  your  work. 

1.  Mr.  Williams  owns  a  retail  grocery  store.  He  buys  most  of  his 
groceries  on  thirty  days'  time,  taking  advantage  of  discounts.  He  sells 
on  time,  to  customers,  and  has  adopted  the  policy  of  allowing  a  29^?  dis- 
count if  they  settle  their  bills  within  10  days.  He  carries,  on  an  average, 
150  customers'  accounts.  His  cash  sales  amount  to  one-third  of  his  total 
sales.  He  deposits  his  cash  in  the  bank  daily,  and  pays  all  his  bills  by 
check. 

Prepare  and  send  in  to  the  University  forms  for  the  following  books 
that  would  be  suitable  in  Mr.  Williams'  business: 

(a)  Cash  Book 

(b)  Purchase  Book 

(c)  Sales  Book 

2.  The  West  Side  Trading  Company  operates  a  men's  retail  store  with 
five  selling  departments.  At  the  close  of  each  month,  the  head  salesman 
wishes  to  know  the  sales  and  purchases,  by  departments.  Accounts  with 
customers  are  divided  between  two  clerks,  and  two  controlling  accounts 
are  used. 

Construct  and  send  in  a  purchase  book  and  a  sales  book  that  would 
meet  the  needs  of  this  business. 

3.  The  bookkeeper  for  the  Northern  Manufacturing  Company  has 
handled  all  sales  and  purchase  discounts  thru  the  general  journal. 

(a)  What  criticism  have  you  to  offer  on  his  method? 

(b)  The  office  manager  suggested  to  the  bookkeeper  to  handle  sales 
discounts  thru  the  cash  book,  by  crediting  the  customers  for  the  full 
amount  of  the  bill  on  the  "Receipts"  side  of  the  cash  book,  and  entering 
the  discount  on  the  "Disbursement"  side.  Was  this  good  advice?  State 
your  reasons. 

4.  Enter  the  following  transactions  in  a  multicolumnar  journal  similar 
to  the  form  shown  on  p.  4  with  any  variations  that  seem  necessary. 

July  1,  1921,  A  B.  Brown  began  a  small  wholesale  business  with  a  cap- 
ital of  $1,000.00  in  the  bank,  and  $2,000.00  merchandise  inven- 
tory. 

8.  Sold  A.  J.  Robinson,  on  account,  $500.00  worth  of  merchandise. 

14.  Sold  merchandise  for  cash,  $105.00. 

19.  Purchased   from   James   Hunter,    on   account,   merchandise   for 
$800.00. 

Assignment  10,  Page  15 


19.  Deposited  in  the  bank  all  cash  on  hand. 

25.  Received  check  from  A.  J.  Robinson  for  $300.00,  and  a  thirty 
days'  promissory  note  for  the  balance  due. 

25.  Deposited  cash  on  hand  in  the  bank. 

29.  Borrowed  $1,500.00  from  the  bank  on  a  ninety  days'  promissory 
note. 

30.  Paid  James  Hunter  in  full  of  account. 

After  you  have  made  the  entries,  close  the  journal  showing  how  the 
journal  should  be  posted — both  totals  and  separate  items. 

5.    Mr.  Brown,  the  proprietor,  says  that  he  doesn't  need  a  Cash 
Account  in  the  ledger.    What  comment  have  you  to  offer  on  this  point? 


Assignment  10,  Page  16 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  fl«/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  11 

ACCOUNTING  PROCEDURE 
FOR  PROMISSORY  NOTES 


SURELY  a  man  has  come  to  himself  only  when  he  has 
found  the  best  that  is  in  him,  and  has  satisfied  his 
heart  with  the  highest  achievement  he  is  fit  for.  It  is 
only  then  that  he  knows  of  what  he  is  capable  and  what 
his  heart  demands. 

WOODROW  WILSON 


LaSalle  Extension  University 

Chicago 


NHA-n 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  tliem  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Jomnal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization  C/U4;^vi  1 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectable  Accounts 

18.  ■[  PAKT:Ni:RSHip:AccouNTiNG— ^-Formation. — Oper-\tio>J   i  ''.  > 

19.  Partj^ership;  Accounting— Dissoi.uTiQN  PRORLEMSTTrTpiNT 

■     -    \''Ek'ft)RES   ■     '"''' ' 

2Qf     Corporation  Accountinx;-— -Formation-— OpERATajQN     ,;;;.! 
21.    .  CoRPOR.ATioN  Accounting — rREORGANizATioNS^MERGERf? 
22!      The  Avouch  JTR  System'  '■■  ""  ' 

23.  Factory  Accounting— MANUFACTURiNif.-STATEME,N;x J  :,:;j 

24.  Factory  Accounting — Perpetual  Inventory — Overhead 
.  .     Distribution^  ._^.-., 

25.  'CcAssii^icATioN^'dF' Accounts 

26.  Single  Entry 

27.  Accounting  for  Xontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

.,  29v  o  Comparative.  Statements  "     •     ^ 

V  30.  -  Analyses  OF  Financial  Statements^General  Review'    •  '--* 


Copyright,  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


ACCOUNTING  PROCEDURE  FOR  PROMISSORY  NOTES 

Promissory  Notes  in  Business.  Almost  eivery  business  operating  on  a 
credit  basis  receives  or  gives  promissory  notes.  They  have  become  a 
great  convenience  in  business,  because  they  can  be  used  as  temporary 
substitutes  for  cash. 

For  example,  customers  who  are  unable  to  pay  their  accounts,  when 
due,  may  be  required  to  give  a  note  for  30  or  60  days.  The  customers 
thus  benefit  by  receiving  an  extension  of  time,  and  the  business  also 
profits,  since  it  can  either  transfer  these  notes  to  a  bank  and  thus 
receive  working  capital,  or  it  can  transfer  them  to  creditors  in  settle- 
ment of  its  accounts.  When  a  business  buys  machinery  or  other  assets 
for  a  large  sum,  it  may  pay  part  cash,  and  offer  a  note  for  the  balance. 
When  it  borrows  money  from  a  bank  or  an  individual,  it  gives  its  note. 

Transactions  like  these  indicate  how  important  and  valuable  promis- 
sory notes  have  become  to  the  business  world.  Their  chief  value  lies 
in  the  fact  that  when  they  are  properly  drawn  up  they  can  be  trans- 
ferred easily  from  one  person  to  another. 

Furthermore,  notes  are  written  evidence  of  obligations.  This  is  the 
reason  why  they  are  usually  preferred  to  open  accounts.  Notes  can  be 
presented  in  court  as  evidence,  in  themselves,  of  indebtedness,  while  an 
open  account  requires  proof  for  each  item  that  is  owed. 

Features  of  Importance  to  Accountant.  Since  promissory  notes  are 
used  so  commonly  in  business  transactions,  it  is  essential  in  your  study 
of  accounting  that  you  not  only  become  familiar  with  the  standard 
forms  of  notes,  but  also  know  how  to  record  properly  all  note  transac- 
tions, both  in  the  accounts  and  in  the  special  books  provided  for  this 
purpose.  We  are  concerned  chiefly  at  this  point  with  the  accounting 
procedure  and  not  with  the  legal  aspects,  which  are  treated  later  in  the 
Business  Law  Section  of  the  course. 

We  shall,  therefore,  take  up  those  features  with  which  you,  as  an 
accountant,  will  be  expected  to  be  familiar: 

I.     The  Standard  Forms  of  Promissory  Notes. 

II.     Entries    on    the    Books    of   Account    for    Various    Transactions 
Involving  Notes. 

III.     The    Special    Note    Registers. 

I.  STANDARD  FORMS  FOR  NOTES 

Form  of  Notes.  Promissory  notes  are  set  up  in  various  forms,  to 
meet  the  needs  of  various  kinds  of  transactions.  The  wording  and  ar- 
rangement need  not  always  be  exactly  the  same;  but  notes  are  usually 
set  up  so  as  to  conform  to  a  more  or  less  uniform  standard.     This  uni- 

NHA-ll 

(10-212)  ■  ; 


formity  has  been  brought  about  both  by  business  practice  and  the  re- 
quirements of  the  law. 

As  notes  came  to  be  used  more  extensively,  laws  governing  their  use 
were  adopted.  In  1896  the  Commissioners  on  Uniform  State  Laws  rec- 
ommended a  bill,  governing  the  use  of  notes,  to  the  various  state  legisla- 
tures for  adoption.  This  law  is  known  as  the  Uniform  Negotiable 
Instruments  Law.  All  the  states  in  the  Union  have  adopted  it  except 
Georgia.  The  Canadian  Parliament  has  also  passed  a  similar  law,  called 
the  Bills  of  Exchange  Act,  for  the  provinces  of  Canada,  and  in  England 
and  thruout  the  English-speaking  world,  similar  legislation  has  been 
enacted. 

Negotiable  Instruments.  The  Uniform  Negotiable  Instruments  Law 
defines  a  negotiable  promissory  note  as  *'an  unconditional  promise  in 
writing  made  by  one  person  to  another,  signed  by  the  maker,  engaging  to 
pay,  on  demand  or  at  a  fixed  or  determinable  future  time,  a  sum  certain 
in  money  to  order  or  to  bearer." 

When  a  promissory  note  fulfills  all  these  requirements,  it  is  said  to 
be  negotiable;  that  is,  it  can  be  transferred  like  money,  from  one  person 
to  another.  Notes  that  are  not  negotiable  are  also  used  in  business; 
they  are  valid,  and  should  be  recorded  on  the  books  in  the  same  way  as 
those  that  are  negotiable,  but  the  person  who  holds  a  nonnegotiable  note 
cannot  pass  it  on  as  easily  as  he  can  a  negotiable  instrument.  The  non- 
negotiable  note  requires  assignment,  and  the  person  to  whom  it  is 
assigned  does  not  acquire  any  better  title  to  the  note  than  was  pos- 
sessed by  the  person  who  assigned  it  to  him.  Because  of  this,  it  is  much 
more  difficult  to  discount  nonnegotiable  notes  than  negotiable  notes. 

Two  of  the  most  commonly  used  notes  are  the  short-term  note  and 
the  demand  note. 

Form  of  Short-Term  Note  Illustrated.  By  short-term  note  is  usually 
meant  a  note  that  does  not  run  over  one  year.  Most  short-term  notes 
mature  in  90  days  or  less.    Figure  1  shows  a  three  months'  note. 

If  the  note  read,  "I  promise,  etc.,  on  condition  that  John  Jones  audit 
my  books,"  or  if  it  read,  "I  promise  to  pay  to  the  order  of  John  Jones,  one 
hundred  dollars,  and  give  him,  in  addition,  my  automobile,  valued  at 
$300,"  it  would  in  neither  case  be  negotiable.  In  the  first  case  the  prom- 
ise would  be  conditional,  and  in  the  second  case  the  promise  is  not  alone 
to  pay  a  certain  sum  in  money,  but  to  do  something  additional.  The 
note,  however,  in  either  case  would  be  valid,  and  it  would  be  binding,  but 
Jones  could  not  legally  pass  it  on  to  a  third  party  by  indorsement  and 
delivery.  It  could,  however,  be  assigned.  ALL  notes,  whether  negotiable 
or  not,  are  to  be  recorded  by  the  accountant,  provided  they  represent  a 
valid  business  transaction. 

Parties  to  Note — Maker  and  Payee.  The  party  signing  the  note  is 
called  the  "maker."  The  party  to  whom  the  note  is  made  payable  is 
called  the  "payee."  In  the  note  under  consideration,  therefore,  Jacob 
Smith  is  the  maker,  and  John  Jones  is  the  payee.  This  note  is  a  note 
receivable,  an  asset,  to  John  Jones,  and  it  is  a  note  payable,  a  liability,  to 
Jacob  Smith. 

Assignment  11,  Page  2 


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Short-Term  Promissory  Note 

Figure  1.  This  promissory  note  is  an  unconditional  promise  in  writing,  made  by 
Mr.  Smith  to  Mr.  Jones,  or  order,  properly  signed  by  Mr.  Smith,  engaging  to  pay  at 
a  determinable  time  a  certain  sum  of  money,  $400.00.  Evidently  the  note  is  nego- 
tiable. You  frequently  find  the  phrase,  "For  value  received,"  included  in  promis- 
sory notes.  This  feature  is  not  essential  to  making  the  note  negotiable.  The  time 
of  payment  may  also  be  stated  in  various  ways.  We  might  have  worded  it  this 
way:  "March  20,  1922,  I  promise,"  etc.  Sometimes  the  maker's  address  is  also 
included.  Because  of  these  variations  it  is  important  that  you,  as  an  accountant, 
familiarize  yourself  with  the  various  kinds  of  notes,  especially  those  most  commonly 

used  in  business. 

The  Demand  Note.  The  demand  note  has  the  same  form  as  the  short- 
term  note  in  all  respects  except  the  time  element.  In  place  of  the  speci- 
fied or  determinable  date  of  a  short-term  note,  the  demand  note  reads, 
"On  demand  I  promise,"  etc.  A  demand  note,  therefore,  is  payable  when- 
ever the  payee  presents  the  note  to  the  maker  for  payment. 

II.  ENTRIES  FOR  PROMISSORY  NOTES 

In  explaining  the  entries  for  transactions  involving  notes,  we  shall 
first  consider  only  notes  not  bearing  interest,  and  later  in  the  lesson  take 
up  entries  for  notes  bearing  interest. 

Notes  Receivable  and  Notes  Payable  Accounts.  All  notes  which  are 
received  from  outsiders  are  assets  and  are  debited  to  a  Notes  Receivable 
Account.  When  notes  are  given  to  outsiders  they  are  credited  to  a  Notes 
Payable  Account,  because  they  are  liabilities.  Long-term  notes,  mortgage 
notes,  and  bonds  are  entered  in  special  accounts,  separate  from  the  short- 
term  notes. 

In  the  illustration.  Figure  1,  Jacob  Smith  gave  the  note  to  John  Jones 
in  settlement  of  an  open  account.  Immediately  before  the  note  was  is- 
sued, Smith's  ledger  contained  an  account  for  Jones.  This  account 
showed  a  credit  balance.  At  the  same  time,  in  the  ledger  of  Jones  there 
appeared  an  account  with  Jacob  Smith,  having  a  debit  balance. 


Assignment  11,  Page  3 


In  other  words,  Smith  owed  Jones  at  least  $400.00.  On  account  of  the 
legal  recognition  of  promissory  notes  and  the  ease  with  which  they  can 
be  transferred,  Jones  preferred  to  have  this  legal  written  recognition  of 
the  debt  rather  than  an  open  account,  which  would  be  rather  difficult  to 
turn  over  to  anyone  else  in  exchange  for  money;  accordingly  Jones  is 
glad  to  accept  the  note. 

Entries  for  Notes  When  They  Are  Issued 

1.  Note  Issued  in  Settlement  of  an  Account.  At  the  time  of  issuing 
the  note,  shown  in  Figure  1,  Smith  will  make  the  entry  in  Figure  2. 

JOURNAL  (Jacob  Smith) 


DATE 

FOL. 

EXPLANATION 

DEBIT 

CREDIT 

1 

1921 

Dec. 

20 

Accounts  Payable   (John  Jones) 

Notes  Payable 

400 

00 

400 

00 

Gave  3  months  note  to  apply  on  account 

Journal  Entry  for  Issue  of  Note 

Figure    2.     Where    the    entry    is    posted    as    shown    here,    the    controlling    account, 

Accounts  Payable,  is  debited  and  a  new  liability  is  set  up  under  the  heading  Notes 

Payable.    Jones's  personal  account  in  the  subsidiary  ledger  is  also  debited. 

When  Jones  receives  the  note  he  makes  the  entry  in  Figure  3. 


.JOURNAL  (John  Jones) 

1921 

Dec. 

20 

Notes  Receivable 

400  00 

Accounts  Receivable    (Jacob  Smith) 

400 

00 

Received  note  to  apply  on  account 

Entry  for  Receipt  of  Note 

Figure  3.     The  indebtedness  of  Smith  to  Jones  still  exists,  but  it  appears  in  another 

form;  namely,  in  the  Notes  Receivable  Account.     The  entry  in  Figures  2  and  3,  as 

you  will  observe,  is  for  the  face  value  of  the  note,  and  in  each  case  must  be  entered 

in   the   appropriate   controlling   account. 

2.  Note  Issued  for  a  Loan.  The  foregoing  entries  are  based  on  the 
assumption  that  Smith  was  a  customer  of  Jones  and  that  the  note  was 
given  in  settlement  of  an  open  account. 

If  such  were  not  the  case,  and  if  Smith  borrowed  $400.00  from  Jones, 
the  entries  on  both  Smith's  and  Jones'  records  would  be  made  in  the  cash 
book. 

Smith  would  enter  the  transaction  in  his  cash  book,  as  in  Figure  4. 


Assignment  11,  Page  4 


CASH  RECEIPTS  (Jacob  Smith) 


DATE 

L.F. 

ACCOUNT  CREDITED 

EXPLANATION 

Cash  Dr. 

Total 

1921 

Dec. 

20 

Notes  Payable 

To  John  Jones 

400 

00 

Figure  4.    Cash  Book.  Entry  b'Or  Issue  op  Note 

Jones  would  make  the  entry  in  his  cash  disbursements  book,  shown  in 
Figure  5. 


CASH   DISBURSEMENTS   (john  Jones) 

DA^ 

rE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

1921 

Dec. 

20 

Notes  Receivable 

Loan  to  Jacob  Smith 

400 

00 

Figure  5.    Cash  Book  Entry  for  Receipt  of  Note 

Entries  When  Notes  Are  Transferred 

Jones,  the  payee,  holds  the  note  as  he  does  any  other  item  of  current 
assets.  If  Jones  is  in  need  of  funds,  this  note  provides  an  easy  means  of 
securing  such  funds,  as  it  may  be  discounted  at  his  bank  (assuming 
of  course,  that  the  parties  to  the  note  have  a  credit  standing  which  the 
bank  is  willing  to  recognize) .  It  is  not  uncommon,  also,  to  find  that  notes 
will  be  transferred  to  creditors  in  payment  or  as  part  payment  of  an 
account.  Let  us  assume  that  Jones,  in  turn,  owes  money  to  the  Cox  Man- 
ufacturing Company,  and  wishes  to  turn  the  note  over  to  them,  in  pay- 
ment of  his  account.  This  he  can  do  by  indorsement,  because  the  note  is 
negotiable,  since  it  meets  all  the  requirements  of  the  Uniform  Negotiable 
Instruments  Law. 

But  before  he  turns  this  note  over  to  the  Cox  Manufacturing  Company 
on  December  27  he  must  indorse  it ;  that  it,  write  his  name  on  the  back  of 
the  note.  There  are  several  kinds  of  indorsements  that  Jones  can  use, 
and  the  kind  of  indorsement  he  uses  will  determine  what  entries  are  to 
be  made  on  the  books  of  account. 

1.  Qualified  Indorsement.  Jones  can  write  on  the  back  of  the  note, 
"Pay  to  the  order  of  the  Cox  Manufacturing  Company,  without  recourse. 
— John  Jones."  This  kind  of  indorsement  releases  John  Jones  from  any 
liability  on  the  contract  of  indorsement.  If  Smith  fails  to  pay  the  note  at 
maturity  Jones  will  not  be  required  to  pay,  on  the  ground  that  he  indorsed 
the  note,  altho  he  may  be  held  liable  on  other  grounds,  discussed  in  the 
Business  Law  Section. 

The  entry  on  Jones's  books  for  this  transaction  is  given  in  Figure  6 : 


Assignment  11,  Page  5 


JOURNAL  (John  Jones^ 


11921 

Dec. 

27 

Accounts  Payable  (Cox  Manufacturing  Co.) 
Notes  Receivable 
Transferred  Smith's  note  to  apply  on  account 

400 

00 

400 

00 

Fi}?ure  6.     Journal  Entry  for  Transfer  of  Note 

When  the  Cox  Manufacturing  Company  receives  this  note  an  entry  as 
shown  in  Figure  7  will  be  made. 


JOURNAL  (Cox  Manufacturing  Co.) 

1921 

Dec. 

27 

Notes  Receivable 

Accounts  Receivable  (John  Jones) 

Received  Smith's  note  from  Jones  in 
settlement  of  his  account 

400 

00 

400 

00 

Figure  7.     Journal  Entry  for  Indorsed  Note 

2.  Indorsement  "In  Blank"  or  'In  Full."  If,  however,  the  Cox  Manu- 
facturing Company  refuses  to  accept  the  note  indorsed  "without  recourse," 
Jones  may  be  asked  to  indorse  it  "In  Blank"  or  "In  Full."  If  he  uses  the 
"In  Blank"  indorsement,  he  will  merely  write  his  name  on  the  back  of  the 
note.  If  he  uses  the  "In  full"  indorsement,  he  will  write,  "Pay  to  the  order 
of  the  Cox  Manufacturing  Company — John  Jones." 

Both  of  these  indorsements  signify  that  if  Smith  fails  to  pay  the  note 
at  maturity,  Jones,  the  indorser,  must  pay  the  legal  holder  of  the  note,  if 
the  legal  holder  takes  proper  steps  to  fix  his  liability.  In  other  words, 
Jones,  by  indorsing  "In  full"  or  "In  blank"  has  assumed  a  liability  that 
may  or  may  not  develop.  It  is  therefore  spoken  of  as  a  "contingent" 
liability  since  it  is  contingent  upon  Smith's  failure  to  pay. 

Assume  that  Jones  indorsed  Smith's  note  "In  full,"  and  gave  it  to  the 
Cox  Manufacturing  Company.  Instead  of  crediting  the  Notes  Receivable 
Account  as  he  did  when  he  endorsed  the  note  "without  recourse,"  he  will 
make  the  entry  in  Figure  8 : 


JOURNAL  (John  Jones) 

1921 

Dec. 

27 

Accounts  Payable  (Cox  Manufacturing  Co.) 
Notes  Receivable  Discounted 

400 

00 

400 

00 

To  show  the  contingent  liability  assumed 
upon  indorsing  Smith's  Note  transferred 
to  the  Cox  Manufacturing  Company 

Figure  8.    Entry  Showing  Contingent  Liabiuty 
Assignment  11,  Page  6 


Purpose  of  Notes  Receivable  Discounted  Account.  Mr.  Jones  will  not 
credit  Notes  Receivable  Account,  because  such  an  entry  would  not  show 
that  he  may  have  to  pay  it  sometime  later.  He  therefore  sets  up  a  new 
account,  called  "Notes  Receivable  Discounted,"  to  which  he  credits  the 
amount  of  the  note.  This  credit  is  a  warning  on  his  books  that  a  contingent 
liability  exists. 

This  account,  Notes  Receivable  Discounted,  is  not  a  liability  account 
but  is  called  a  valuation  account.  It  is  nothing  more  than  the  credit  side 
of  the  Notes  Receivable  Account  set  up  as  a  separate  account  for  the  time 
being,  and  is  to  be  considered  in  determining  the  true  value  of  the  asset, 
Notes  Receivable. 

Notes  Receivable  Discounted  on  the  Balance  Sheet.  If  the  Notes 
Receivable  Discounted  Account  has  a  balance  at  the  time  the  balance  sheet 
is  set  up,  this  amount  should  be  shown  somewhere  on  the  balance  sheet, 
since  it  represents  a  contingent  liability. 

It  can  be  shown  in  one  of  three  places : 

1.  As  a  deduction  from  the  Notes  Receivable  amount  on  the  asset 
side,  with  the  net  amount  of  Notes  Receivable  extended  in  the 
column  for  asset  amounts. 

2.  On  the  liability  side,  in  short,  that  is,  not  extended  in  the  column 
for  liability  amounts. 

3.  In  a  footnote  at  the  bottom  of  the  balance  sheet. 

Entries  When  Note  Is  Paid  by  Maker 

Continuing  the  history  of  Smith's  note,  if  Smith  pays  the  Cox  Manu- 
facturing Company  at  maturity,  the  following  entries  are  made: 

In  the  Cash  book  of  the  Cox  Manufacturing  Company  (Receipts  side). 
See  Figure  9. 


CASH  RECEIPTS  (Cox  Manufacturing  Co.) 


DATE 

L.F. 

ACCOUNT  CREDITED 

EXPLANATION 

Cash  Dr. 

Total 

1922 

Mar. 

20 

Notes  Receivable 

From  Jacob  Smith   in  pay- 
ment of  note 

400 

00 

Figure  9.     Entry  When  Note  Is  Redeemed 

In  the  Cash  book  of  Jacob  Smith  (Disbursements  side).    See  Figure  10. 

Assignment  11,  Page  7 


CASH  DISBURSEMENTS  (Jacob  Smith) 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

1922 
Mar. 

20 

Notes  Payable 

Paid  to  Cox  Manufacturing 
Company 

400 

00 

Figure  10.    Entry  for  Payment  of  Note 
John  Jones  will  make  the  entry  given  in  Figure  11 : 


JOURNAL  (John  Jones) 


1922 
Mar. 

20 

Notes  Receivable  Discounted 

Notes  Receivable 

Relieved  of  Contingent  liability  since 
Smith  paid  holder  of  note  we  indorsed 

400 

00 

400 

00 

Figure  11.     Entry  on  Books  of  Indorser 

By  this  journal  entry  Jones  writes  off  his  contingent  liability,  and  his 
Notes  Receivable  Account  will  show  the  net  amount  of  Notes  Receivable. 
The  question  arises,  How  will  Jones  know  that  he  is  released  from  his 
contingent  liability,  and  that  he  is  justified  in  making  this  entry?  The 
Negotiable  Instruments  Law  specifies  with  considerable  definiteness  the 
time  within  which  the  holder  of  the  note  must  notify  an  indorser  of  his 
liability,  in  case  the  maker  does  not  pay.  Therefore,  if  Jones  receives  no 
such  notice  in  the  prescribed  time,  he  will  be  justified  in  making  the 
journal  entry. 

Procedure  in  Case  Note  Is  Dishonored.  If  Smith  fails  to  pay  $400.00 
on  March  20,  1921,  the  Cox  Manufacturing  Company  will  probably  notify 
Jones,  the  indorser,  thus  giving  him  an  opportunity  to  pay,  without  in- 
curring any  legal  expense.  If  Jones  does  not  pay,  in  other  words  dis- 
honors the  note,  the  company  will  protest  it.  The  company  will  turn  the 
note  over  to  a  notary  public  who  will  go  to  the  maker  and  demand  pay- 
ment. The  notary  will  fill  out  a  certificate  of  protest,  and  send  the 
indorser  a  notice  of  protest,  thereby  fixing  his  liability.  The  contingent 
liability  thus  becomes  a  real  liability  to  the  indorser  upon  receipt  of  such  a 
notice.  John  Jones  will  therefore  be  required  to  pay  $400.00  to  the  Cox 
Manufacturing  Company,  the  face  of  the  note,  and  also  the  expenses  in- 
curred in  protesting  the  note.    Assume  here  that  the  protest  fee  is  $2.00. 

Assignment  11,  Page  8 


Entries  for  Dishonored  Notes 

When  a  note  is  dishonored,  the  holder  of  the  note  will  undertake  to 
collect  from  the  indorser.  Accordingly,  entries  must  be  made  on  the  books 
of  both  parties. 

Entries  Made  by  the  Payee.  At  the  time  the  Cox  Manufacturing 
Company  took  over  the  note  from  John  Jones,  they  made  the  entry  in 
Figure  12. 

JOURNAL  (Cox  Manufacturing  Co.) 


1921 

Dec. 

27 

Notes  Receivable 

Accounts  Receivable  (John  Jones) 

Received  Smith's  note  from  Jones  in  settle- 
ment of  his  account 

400 

00 

400 

00 

Figure  12.    Entry  fob  Transfer  of  Note 

Now  when  Smith  dishonors  the  note,  the  Cox  Manufacturing  Company 
will  pay  the  protest  fee,  will  write  off  the  note  in  the  Notes  Receivable 
Account,  and  charge  Jones  with  the  face  of  the  note,  $400.00  by  the  entry 
of  Figure  13. 


JOURNAL  (Cox  Manufacturing  Co.) 

1922 
Mar. 

21 

Accounts  Receivable  (John  Jones) 

Notes  Receivable 

Payment  refused  on  Smith's  note  indorsed 
by  Jones 

400 

00 

400 

00 

Figure  13.     Entry   for   Dishonored   Note 

The  payment  of  the  $2.00  protest  fee  is  also  charged  to  John  Jones's 
open  account,  thru  the  cash  disbursements  book.    See  Figure  14. 

CASH  DISBURSEMENTS  (Cox  Manufacturing  Co.) 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

1922 
Mar. 

22 

Accounts  Receivable 
(John  Jones) 

Protest  Pees  on  dis- 
honored note. 

2 

00 

Figure  14.     Entry  for  Protest  Fee 


Assignment  11,  Page  9 


Some  accountants  would  prefer  to  charge  the  total  $402.00  to  a  "Notes 
Dishonored"  account  instead  of  to  Jones'  personal  account,  because  by 
charging  it  to  an  open  account  it  would  appear  that  the  nature  of  the 
claim  was  changed  from  a  note  claim  to  an  open  account  claim.  They  say 
that  the  Cox  Manufacturing  Company's  claim  is  still  on  the  note;  there- 
fore, it  should  be  transferred  to  a  note  account,  called  Dishonored  Notes. 

If  this  is  done,  however,  the  fact  is  not  clearly  stated  on  the  books 
that  it  was  Jones  who  transferred  the  note  that  was  dishonored  later. 
This  fact  the  Cox  Manufacturing  Company  should  have  clearly  recorded 
on  its  books  for  future  reference  in  its  dealings  with  Jones.  For  this 
reason,  we  prefer  to  charge  the  total  $402.00  to  the  open  account  of  John 
Jones,  instead  of  to  a  Dishonored  Note  Account. 

Entries  Made  by  the  Indorser.  John  Jones'  account  in  the  ledger  of 
the  Cox  Manufacturing  Company  will  now  show  a  total  debit  balance  of 
$402.00. 

John  Jones'  books  show  a  contingent  liability  of  $400.00.  The  Cox 
Manufacturing  Company,  however,  now  has  a  claim  on  John  Jones  for 
$402.00.  When  Jones  pays  this,  March  23,  1922,  he  will  make  the  entry 
of  Figure  15. 

CASH  DISBURSEMENTS  (John  Jones) 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

1922 
Mar. 

23 

Notes  Receivable  Dis- 
counted 
Jacob  Smith 

For  Jacob  Smith's  note 
Protest  Fees 

400 
2 

00 
00 

1 

Figure  15.     Entry  for  Payment  of  Dishonored  Note  by  Indorser 

Thus  he  charges  Smith,  the  maker,  with  the  protest  fee,  because  it  is 
an  expense  incurred  by  Smith's  not  paying  the  note. 

Jones  will  also  make  a  journal  entry  charging  Smith  with  the  face 
value  of  the  note  as  given  in  Figure  16. 


JOURNAL  (John  Jones) 


1922 
Mar. 

23 

Accounts  Receivable   (Jacob  Smith) 
Notes  Receivable 
For  note  Smith  refused  to  pay 

400 

00 

400 

00 

Figure  16.    Entry  for  Dishonored  Note 
The  total  charge  on  Jones'  books  against  Smith  is  now  $402.00. 

Assignment  11,  Page  10 


Entries  Made  by  the  Maker.  Now,  Jones  holds  the  note,  and  will 
try  to  collect  $402.00  from  Smith.  If  Smith  pays  the  $402.00,  Smith 
makes  an  entry  in  his  cash  book  on  the  disbursement  side  as  shown  in 
Figure  17. 


CASH  DISBURSEMENTS  (Jacob  Smith) 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

Notes  Payable 
Expense 

For  note  previously 
dishonored 
Protest  Fees 

400 
2 

00 
00 

Figure  17.     Entry  fob  Payment  by  Maker 

Jones  records  the  receipt  of  cash  in  his  cash  book  as  in  Figure  18. 

CASH  RECEIPTS  (John  Jones) 


DATE 

L.F. 

ACCOUNT  CREDITED 

EXPLANATION 

Cash  Dr. 

Total 

Jacob  Smith 

For  dishonored  note  plus 
protest  fees 

402 

00 

Figure  18.     Entry  When  Dishonored  Note  Is  Paid 


If  Smith  refuses  to  pay  his  open  account  with  Jones,  Jones  will  either 
write  off  the  $402.00  as  a  loss  like  any  other  loss  on  bad  debts,  or  he  will 
bring  suit  against  Smith,  and  will  present  the  note  as  evidence  of  Smith's 
indebtedness. 


Assignment  11,  Page  11 


INTEREST-BEARING  NOTES 

Up  to  this  point  interest  has  not  been  considered.  In  the  preceding 
case  the  note  did  not  bear  interest.  When  you  are  dealing  with  interest- 
bearing  notes,  two  things  must  be  considered: 

1.  The  calculation  of  interest. 

2.  Entries  on  the  books  for  notes  bearing  interest. 

It  is  assumed  that  you  understand  the  methods  of  calculating  simple 
interest,  and  we  shall  therefore  not  go  into  that  at  this  point.  If  you  are 
a  little  out  of  practice  on  interest  calculations,  a  brief  review  of  the  subject 
in  any  easily  obtainable  elementary  text  on  arithmetic  will  be  of  value  at 
this  point. 

Interest  Accounts.  Interest  may  be  thought  of  as  the  "wages"  of 
money  or  the  "rent"  of  money.  It  will  cost  us  something  to  secure  the  use 
of  money,  just  as  it  would  cost  something  to  secure  the  use  of  a  house. 
If,  on  the  other  hand,  we  have  more  money  than  we  can  use,  it  will  earn 
something  if  we  lend  it  to  someone  who  can  employ  it  to  advantaKe.  Thus, 
there  is  need  for  an  Interest  Expense  Account  and  an  Interest  Earned 
Account. 

Occasionally  where  interest  transactions  are  few  and  small  in  amount 
one  Interest  Account,  which  is  charged  with  Interest  Expense  and  credited 
with  Interest  Earned  ^vill  suffice,  but  if  interest  enters  into  the  accounts 
often,  it  will  simplify  the  accounting  to  have  two  interest  accounts.  Ac- 
counting in  general  is  opposed  to  "mixed  accounts,"  i.  e.,  accounts  in  which 
are  entered  several  distinct  values,  as  interest  expense  and  interest  in- 
come.   Mixed  accounts  never  add  clearness,  rather  the  opposite. 

The  entries  for  simple  interest  of  both  kinds  are  shown  below : 

Journal  Ledger 

Debit  Interest  Expense  $40.00  Interest  Expense 

Credit  Cash  $40.00 


(Entry  for  interest  paid  in  cash)  Cash  $40.00 


Cash  $30.00  Interest  Earned 

Interest  Earned  $30.00 


(Entry  for  interest  received  in  cash)  |  Cash  $30.00 


Calculation  of  Discount — Entries  on  Books.  Closely  related  to  interest 
is  bank  discount.  If  we  borrow  $100.00,  and  at  the  expiration  of  the  time 
pay  back  $102.00,  the  two  dollars  are  called  interest.  If  we  give  our  note, 
promising  to  pay  $100.00,  and  receive  for  it  $98.00  in  cash,  the  two  dollars 
which  the  bank  deducts  is  called  bank  discount.  In  effect,  then,  bank  dis- 
count is  simply  interest  paid  in  advance.  In  accounting  it  is  customary  to 
enter  bank  discount  in  the  Interest  Account  and  not  set  up  a  special  ac- 
count for  it,  except  for  purposes  of  analysis. 

Assignment  11,  Page  12 


Here  are  four  typical  cases  in  which  the  calculation  and  entry  of  dis- 
count are  involved: 

Case  1.  Discounting  our  note  at  the  bank 

Case  2.  Discounting  a  noninterest-bearing  note  for  a  customer 

Case  3.  Transferring  a  customer's  note  to  a  creditor 

Case  4.  Discounting  an  interest-bearing  note  for  a  customer 

Case  1.  Discounting  Our  Note.  April  1,  1922,  we  discount  our  30-day 
note  for  S200.00,  and  deposit  the  proceeds  with  the  bank.  The  note  does 
not  bear  interest,  but  it  is  discounted  at  6  per  cent. 

We  cannot  make  the  entry  until  we  have  calculated  the  amount  of  the 
discount.  First,  then,  there  is  a  simple  problem  in  interest,  viz.,  $200.00 
at  6  per  cent  for  30  days.  The  discount  is  found  to  be  $1.00.  By  deduct- 
ing this  discount  from  the  amount  of  the  note,  we  find  the  proceeds,  that 
is,  the  amount  of  cash  received  from  the  bank. 

The  accounts  will  be  affected  thus:  Cash  is  increased  by  this  trans- 
action, our  liabilities  on  outstanding  notes  payable  are  increased,  and  we 
have  incurred  an  expense  of  $1.00  in  securing  this  loan.  From  such  an 
analysis  the  facts  can  be  entered  in  the  accounts  thru  the  cash  book  as 
shown  in  Figure  19. 


CASH  RECEIPTS 


Date 

L.F. 

Account  Credited        Explanation 

Account 
Receiv- 
able 
Credit 

General 

Ledger 

Cr. 

Net 
Cash 

Total 

1922 

April 

1 

Notes  Payable 
*Interest  and 
Discount 

20000 
100 

199  00 

Entry  for  Discount  of  Our  Own  Note 

Figure  19.  The  asterisk  (*)  means  that  the  $1.00  item  is  entered  in  red  ink,  so  that  at 
time  of  posting  it  will  be  posted  as  a  debit  and  not  a  credit.  Some  accountants  would 
prefer  to  credit  Notes  Payable  with  the  net  amount  of  cash  received,  $199.00,  and  then 
make  a  general  journal  entry,  debiting  Interest  Expense  and  crediting  Notes  Pay- 
able with  the  $1.00  discount.  In  this  way,  however,  the  transaction  is  split  up  in  two 
places,  part  being  put  in  the  cash  book  and  part  in  the  general  journal.  The  red-ink 
entry,  as  shown  above,  is  therefore  usually  preferred. 

At  the  expiration  of  the  30  days  we  would  be  called  upon  to  pay  the 
face  value  of  the  note.  The  entry  would  then  be  on  the  disbursements  side 
of  the  cash  book  as  in  Figure  20. 


Assignment  11,  Page  13 


CASH  DISBURSEMENTS 


DATE 

L.F. 

ACCOUNT  DEBITED 

EXPLANATION 

Cash  Cr. 

Total 

1922 
May 

1 

Notes  Payable 

Payment  of  30-day  note 

200 

00 

Figure  20.     Entry  for  Payment  of  Note 

There  is  no  question  of  interest  or  discount  at  this  time,  since  that 
charge  was  deducted  in  advance.  We  are  now  repaying  $200.00  to  the 
bank,  altho  we  received  in  actual  cash  only  $199.00;  thus  the  lender  does 
not  receive  in  cash  the  earning  from  his  money  until  the  loan  is  paid. 

Case  2.  Discounting  Note  for  a  Customer.  It  often  happens  that  a 
merchant  is  owed  a  sum  of  money  by  an  individual  who  desires  postpone- 
ment of  payment.  In  such  a  case,  the  customer  may  offer  the  merchant 
a  promissory  note  for  the  amount  of  the  debt;  the  merchant  may  be 
willing  to  accept  the  note,  but  since  the  debt  is  due  now  he  is  justified  in 
accepting  the  note.  The  credit  he  will  allow  will  be  less  than  the  face  value. 
That  is,  the  merchant  may  accept  a  $300.00  note  as  being  worth  only 
$297.00,  in  partial  settlement  of  a  debt  of  $300.00.  The  $3.00,  which  the 
merchant  ultimately  receives  in  excess  of  the  $297.00  credit  allowed,  is  in 
the  nature  of  interest  (or  discount)  and  reimburses  him  for  the  incon- 
venience of  extending  the  time  of  final  payment  as  the  customer  requests. 

To  illustrate,  on  April  1,  1922,  we  discount  a  customer's  60-day  non- 
interest  bearing  note,  for  $400.00,  at  6  per  cent,  and  apply  the  proceeds  to 
the  partial  settlement  of  his  account  with  us.  What  we  must  do  here,  as 
indeed  we  had  to  do  in  Case  1,  also,  is  to  find  the  present  value  of  this  note, 
that  is,  its  value  to-day  in  view  of  the  fact  that  payment  is  not  to  be 
received  until  60  days  hence.  A  dollar  in  hand  to-day  is  worth  more  than 
a  dollar  promised  in  60  days,  or  a  year  hence,  because  in  that  intervening 
time  the  dollar  can  earn  interest.  That  is,  to  take  the  promise  of  a  dollar, 
instead  of  an  actual  dollar,  is  to  forego  the  possible  interest  to  be  had  in 
immediately  lending  the  dollar  again.  Therefore,  business  men  usually 
require  some  compensation  for  foregoing  present  payment  when  a  debt 
becomes  due. 

In  the  case  before  us,  we  can  hardly  accept  the  $400.00  note  in  settle- 
ment of  a  full  $400.00  debt,  for  to  do  so  would  be  to  forego  the  possible 
interest  we  could  earn,  if  we  had  received  the  cash,  as  we  are  entitled  to. 
Therefore,  we  calculate  the  present  value  of  the  note  and  allow  the 
customer  credit  for  that  amount. 

The  present  value  may  be  considered  in  this  discussion  as  the  maturity 
value  (i.  e.,  the  value  at  the  due  date)  less  the  discount  calculated  from 


Assignment  11,  Page  14 


to-day,  the  day  of  discount,  to  the  day  of  maturity.    Expressed  in  formula, 
this  becomes: 

Present  value=Maturity  Value  Minus  the  Discount. 

Discount=Maturity  Value  X  rate  X  time. 

Discount  is  thus  seen  to  be  a  problem  in  interest  calculation. 

The  facts,  then,  are  as  follows:  Maturity  value,  $400.00;  discount, 
$4.00 ;  present  value,  $396.00.  From  these  facts  the  journal  entry  is  easily 
constructed,  as  shown  in  Figure  21. 

JOURNAL 


1922 
April 

1 

Notes  Receivable 

Accounts  Receivable 

Interest  Earned 

Received  customer's  60  day  note  at  six 
per  cent  discount 

400 

00 

396 
4 

00 
00 

Figure  21.     Discounting  Customer's  Note 

Here  we  express  the  fact  that  we  have  received  a  $400.00  addition  to 
our  Notes  Receivable,  that  $396.00  of  the  preexisting  Accounts  Receivable 
has  been  canceled,  and  that  by  accepting  this  note  in  lieu  of  cash  in  hand 
we  have  earned  $4.00. 

As  in  Case  1,  the  money  for  the  earning  is  not  received  until  the  note 
is  paid,  but  we  know  that  this  does  not  alter  the  present  entry,  for  earn- 
ings are  shown  when  earned,  not  when  collected;  and  expenses  are  shown 
as  costs  when  incurred,  not  when  paid.  The  cash  entry  made  later  when 
the  note  is  paid  is  given  in  Figure  22. 


CASH  RECEIPTS 

DATE 

L.F. 

ACCOUNT  CREDITED 

EXPLANATION 

Cash  Dr. 

Total 

1921 

June 

1 

Notes  Receivable 

Customer  pays  60  day 
note 

400 

00 

Figure  22.     Customer's  Note  Paid 


Assignment  11,  Page  15 


In  this,  it  will  be  observed  that  the  entry  to  be  made,  in  connection 
with  a  note,  is  not  affected  bj^  the  fact  that  the  note  has  been  discounted. 

Case  3.    Discounting  Customer's  Note  by  Transferring  to  a  Creditor. 

Assume  that  thirty  days  after  receiving  the  above  note  (Case  2),  we  turn 
it  over  to  someone  we  owe,  at  its  then  present  value.  Discount  at  6  per 
cent. 

The  calculation  is  the  same  as  in  Case  2,  the  only  change  being  in  the 
"time"  element.  The  present  value,  as  before,  is  the  maturity  value  less 
the  discount  for  the  unexpired  time.  The  facts  are  these :  maturity  value, 
$400.00;  discount  (for  30  days),  $2.00 ;  present  value,  $398.00.  These  facts 
are  journalized  in  Figure  23. 


JOURNAL 


1922 
May 

1 

Accounts  Payable 

Interest  Expense 

Notes  Receivable  Discounted 

Indorsed  a  customer's  60  day  note  over 
to  a  creditor 

398 
2 

00 
00 

400 

00 

Figuro  23.    Transfer  of  a  Note  Previously  Discounted 


Here  we  give  up  a  note  with  a  maturity  value  of  $400.00,  but  we  are 
not  allowed  that  much  for  it,  since  the  creditor  is  now  in  the  position  we 
were  in  in  Case  2,  and  he  will  not  be  willing  to  defer  payment  unless  com- 
pensated. On  our  side,  the  two  dollars  deducted  in  finding  the  present 
worth  becomes  an  expense,  since  we  part  with  a  $400.00  value,  and  onlv 
discharge  $398.00  of  the  debt  thereby. 

Our  relation  to  this  note  has  been  that  we  received  it  from  a  customer 
in  discharge  of  his  debt ;  that  we  held  the  note  for  30  days ;  and  that  we  in 
turn  gave  the  note  over  to  one  of  our  creditors  in  discharge  of  our  debt. 
When  originally  received,  the  note  was  valued  at  $396.00  and,  if  we  had 
held  it  until  maturity,  we  would  have  received  $400.00  for  it,  thereby 
earning  $4.00.  But  we  hold  it  for  one  month  only.  We,  therefore,  cannot 
expect  to  earn  the  full  $4.00,  as  our  creditor,  if  he  holds  the  note  for  the 
remainder  of  the  time,  will  also  expect  to  earn  something.  The  journal 
entry  for  Discount  under  Case  2  is  based  on  the  assumption  that  we  will 
hold  the  note  to  maturity  and  earn  $4.00.  The  journal  entry  above  in 
Case  3  shows  $2.00  debited  to  Interest  Expense  to  express  the  fact  that 
our  income  is  $2.00  less  than  it  was  previously  calculated  to  be.  With 
$2.00  in  Interest  Expense  and  $4.00  in  Interest  Income  the  net  result  is 
that  we  have  earned  only  $2.00.  This  is  equivalent  to  interest  on  our 
money  during  the  one  month  in  which  it  was  invested  in  the  note. 


Assignment  11,  Page  16 


If  we  turned  the  note  (in  Case  3  above)  over  to  our  bank  instead  of  a 
creditor,  the  entries  would  be  nearly  the  same.  The  debit  to  Accounts 
Payable  would  be  replaced  by  a  debit  to  cash  or  bank,  other  items  remain- 
ing the  same  as  in  the  last  journal  entry  above. 

There  are  other  cases  in  connection  with  the  discounting  of  notes  still 
to  be  considered.  They  are  similar  to  Cases  2  and  3,  but  they  are  different 
in  that  these  new  cases  involve  the  discounting  of  interest-bearing  notes. 

Case  4.  Discounting  Customer's  Interest-Bearing  Note.  On  April  1, 
1922,  we  discount  a  customer's  60-day  note  (face,  $500.00,  with  interest  at 
5  per  cent) ,  and  apply  the  proceeds  to  the  partial  settlement  of  his  account 
with  us.    The  discount  rate  is  6  per  cent. 

You  should  observe  here  that  the  calculations  of  discount  on  an  interest- 
bearing  note,  and  on  a  noninterest-bearing  note  differ  slightly.  The  dif- 
ference lies  in  the  amount  used  as  "principal." 

It  has  been  pointed  out  that  discount  was  calculated  on  "maturity 
value,"  as  the  principal.  That  holds  true  whether  the  note  bears  interest 
or  not,  but  the  maturity  value  of  an  interest-bearing  note  is  not  the  same 
amount  as  it  would  be  if  the  same  note  were  noninterest-bearing.  A  note 
which  bears  interest  accumulates  that  interest  day  by  day  until  maturity. 
At  that  last  date  when  the  note  is  due,  the  interest  on  it  is  due  as  well,  so 
it  may  be  said  that  the  note  is  worth  at  that  time  the  face  value  plus  the 
interest. 

The  maturity  value,  then,  of  an  interest-bearing  note  is  the  sum  of  the 
face  value  and  the  interest;  the  maturity  value  of  a  noninterest-bearing 
note  is  only  the  face  value. 

The  calculations  for  the  transaction  given  above  are  as  follows: 

$500.00  face  value 

4.17  interest  at  5%  for  60  days   (Unearned) 


$504.17  maturity  value 

5.04  discount  on  maturity  value  for  60  days  at  6%  (Earned) 


$499.13  present  worth  of  note,  or  amount  of  credit  allowed  customer. 
The  entries  on  our  books  will  appear  as  in  Figure  24. 


JOURNAL 


1922 
April 

1 

Notes  Receivable 

Accounts  Receivable 
Interest  and  Discount 
Discounted  customer's  60  day  note 

500 

00 

449 

13 
87 

Figure  24.     Discounting  Interest  Bearing  Note 

Assignment  11,  Page  17 


The  87  cents  credited  to  Interest  and  Discount  Account  is  the  difference 
between  the  unearned  interest  $4.17  and  the  earned  interest  $5.04.  This 
87  cents  represents  the  net  earning  that  we  make  on  the  transaction.  We 
receive  a  note  that  bears  interest  at  5  per  cent,  and  give  the  customer 
credit  for  the  maturity  value  (face  value  plus  interest)  minus  a  6  per  cent 
discount.    The  extra  1  per  cent  is  an  earning  for  us. 

A  similar  case  more  often  met,  is  one  in  which  our  customer  indorses 
over  to  us  an  interest-bearing  note  he  has  received  from  a  third  party 
some  time  previous. 

Assume  that  John  Henderson  (our  customer)  owes  us  $800.00,  and  in 
partial  settlement  of  his  account  indorses  over  to  us  the  note  he  holds 
from  J.  P.  Kline.  This  note,  dated  October  25,  1921,  is  to  run  for  60  days ; 
it  is  for  the  amount  of  $600.00  and  draws  interest  at  the  rate  of  5  per  cent. 
It  is  indorsed  over  to  us  on  November  3  at  a  discount  rate  of  6  per  cent. 
The  calculations  preceding  the  formation  of  the  entries  are  as  follows : 

$600.00  face  value. 

5.00  interest  at  5  per  cent  for  60  days.     (Unearned.) 


$605.00  maturity  value. 

5.14  discount  on  M/V  at  6  per  cent  for  51  days  (November  3  to 
December  24,  the  date  note  is  due).     (Earned.) 


$599.86  present  worth,  or  amount  allowed  Henderson  on  the  note. 

A  brief  analysis  will  now  make  clear  the  accounting  entries  to  be  made 
from  the  facts  shown  in  the  above  calculation. 

We  have  acquired  a  note  with  a  maturity  value  of  $605.00.  To  show 
this  fact  properly  in  our  accounts,  it  is  necessary  to  show  the  Notes 
Receivable  Account  increased  $600.00.  Thus,  our  ledger  is  made  to  indi- 
cate that  we  are  ultimately  to  receive  $600.00  from  the  settlement  of  the 
note.  The  $5.00  Interest  is  still  unearned,  but  if  we  hold  the  note  until 
maturity  we  can  expect  to  receive  this  amount  also.  Some  accountants 
would  prefer  to  set  up  this  $5.00  as  Interest  Receivable,  and  offset  it  with 
the  full  amount  of  discount. 

Altho  we  have  thus  acquired  a  claim  to  a  future  payment  of  $600.00, 
we  cannot  afford  to  give  our  customer  (Henderson)  credit  for  this  amount, 
because  our  money  will  be  tied  up  in  this  note  until  December  24.  We 
therefore  deduct  a  discount  of  $5.14  for  the  unexpired  time  as  our  com- 
pensation for  waiting  still  longer  for  our  money.  This  discount  is  an 
earning.  It  is  offset  by  the  unearned  Interest  of  $5.00.  The  net  amount  is 
14  cents,  on  the  credit  side.  As  such  it  should  be  credited  to  an  inconie 
account — Interest  Earned  in  this  case.  The  present  value  of  the  note  is 
the  amount  we  can  afford  to  allow  Henderson  credit  for.  Assembling  these 
debits  and  credits,  we  have  the  entry  set  up  in  Figure  25. 


Assignment  11,  Page  18 


JOURNAL 


1921 

Nov. 

3 

Notes  Receivable 

Interest  Earned 

Accounts  Receivable  (John  Henderson) 
Discounted  J.  P.  Kline's  note,  turned  over 
to  us  by  John  Henderson 

600 

00 

599 

14 
86 

i 

Figure  25 

Other  cases  might  be  presented  involving  the  discounting  of  interest- 
bearing  notes,  but  the  principle  of  calculating  discount,  and  the  entries 
necessary  on  the  books,  will  virtually  be  the  same. 

If  you  understand  fully  the  fundamental  principles  illustrated  in  the 
foregoing  cases,  you  will  know  how  to  handle  these  transactions  as  they 
occur.    For  your  convenience,  a  summary  of  these  principles  follows : 

1.  Interest  is  calculated  on  the  face  value  for  the  time  the  note  is  to  run. 

2.  Discount  is  calculated  on  the  maturity  value  for  the  unexpired  time  the  note 
has  yet  to  run. 

3.  Maturity  value  is  the  sum  of  the  face  value  and  the  total  interest. 

4.  Present  worth  is  the  maturity  value  less  the  discount. 

5.  The  unexpired  time  the  note  has  to  run  is  calculated  from  the  date  of  dis- 
count to  the  due  date,  counting  in  only  the  due  date,  and  not  the  date  of 
discount. 

III.    SPECIAL  BOOKS  FOR  PROMISSORY  NOTES 

Notes  Receivable  and  Payable  Books.  Little  has  been  said,  thus  far 
in  this  assignment,  on  the  various  ways  of  handling  note  transactions  in 
the  special  books  of  original  entry.  Most  of  the  entries  have  been  made  in 
the  general  journal,  because  that  is  the  way  they  are  handled  when  a  busi- 
ness handles  only  a  sm.all  number  of  notes.  When,  however,  the  volume  of 
note  transactions  is  large,  special  books  may  be  used  to  advantage  as 
shown  in  Figures  26  and  27. 

Used  as  Posted  Mediums.  These  books  are  provided  with  special 
columns  in  which  is  recorded  all  important  information  in  detail.  In  the 
case  of  notes  receivable,  one  wants  such  facts  as  the  date  received,  the 
party  from  whom  a  note  is  received,  the  face  amount  of  the  note,  the 
amount  of  interest  accrued  at  date  of  acquisition  (if  it  has  been  trans- 
ferred to  someone  other  than  the  original  payee),  the  name  of  the  maker, 
the  date  of  issue,  the  time  to  run,  the  rate  of  interest,  date  of  maturity, 
where  payable,  and  other  facts  showing  whether  the  note  was  left  with  a 
bank  for  collection,  the  date  paid,  or  the  fact  that  it  was  dishonored,  if 
such  is  the  case,  etc. 

At  the  end  of  the  period  or  oftener  the  notes  receivable  debited  column 
is  totaled,  and  the  amount  is  posted  as  a  debit  to  the  Notes  Receivable 
Account  in  the  ledger.  The  corresponding  credits  are  made  to  the  proper 
accounts — Sales  Account  in  the  case  of  sale,  and  to  the  customer  in  case 
of  the  settlement  of  account,  etc. 


Assignment  11,  Page  19 


NOTES  RECEIVABLE 


No. 

1 
2 
3 
4 

When 
Received 

Drawer  and 
Indorser 

Drawer  or 
Maker 

In  Whose 
Favor 

For  What 
Received 

Where  Payable 

DATE             1 

Yr. 

Month 

Day 

1922 
March 
May 
June 
July 

17 

13 

6 

8 

Henry  Dodd 

John  Morton 
Henry  Elkin 
Jas.   Smyth 
Elmer  Way 

Wilfred  Gass 
Henry  Dodd 

Open  a/c 

let  Nat.   Bank 
Lincoln,  Nebr. 
32  Wall   St.   N.   Y. 
Lincoln  Lr.   Co. 
20  Milk  St. 
Boston 

1922 

March 
May 
June 
May 

14 

11 

3 

16 

Notes  Receivable  Book 

Figure  26.     Every  column  in  this  notes  receivable  book  contains  information  that  is 
important  to  the  business,   such   as   dates,  names   of  persons   from  whom  notes   are 

NOTES  PAYABLE                                                                               ' 

No. 

When 
Given 

Drawer  and 
Indorser 

Drawer  or 
Maker 

In  Whose 
Favor 

For  What 
Given 

Where  Payable 

DATE 

Yr. 

Month 

Daj 

1 

2 
3 

1922 
Feb. 
Mar. 
May 

21 

6 

18 

Wilfred  Gass 
Perry  Ragan 

Wilfred  Gass 
Wilfred  Gass 
Acceptance 

Elmer  Smith 
John  Wilkins 
Perry  Ragan 

Hardware 

Lumber 

Glass 

Union  Trust 

Co.   Bank 

Our  Office 
II         II 

1922 
II 

Feb. 

March 

May 

21 

6 

18 

1 

i 

Notes  Payable  Book 

Figure  27.     You  will  notice  that  the  notes  payable  book  has  columns  similar  to  those 
in  the  notes  receivable  book,  except  the  columns  headed  "When  Given"  and  "For  What 


(Forms  continued  on  opposite  page.) 


Assignment  11,  Page  20 


NOTES  RECEIVABLE 


WHEN  DUE 


lYear 


Da. I 
Mo. 
Mo. 
Mo. 


Jan. 


Feb. 


Mar. 


Apr. 


May 


16 


June 


July 


Aug. 

1 
16 


Sept. 


Oct. 


Nov. 


Dec. 


Amount 


136 

6,750 

300 

200 


WHEN  AND  HOW 
DISPOSED  OF 


May  19  Collected 

Aug.  15  Collected 

Oct.  1  Protested 

Aug.  16  Collected 


I 


Notes  RECBavABij;  Book 

received,  names  of  indorsers,  time  notes  are  due,  and  dates  when  collected, 
notes  receivable  books  also  have  columns  for  the  interest  and  amounts. 


Some 


NOTES  PAYABLE 


WHEN  DUE 

WTTF.NT  ATVjn  HOW 

ime 

Year 

Jan. 

Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Amount  1     DISPOSED  OF  " 

Mo. 

Da. 
Da. 

21 
5 

16 

3,000 

260 

80 

GO 
00 
00 

May  21     Paid 
May     5     Paid 
Aug.   16  Paid 

Notes  Payable  Book 

Given."    Study  the  entries  in  this  book  and  determine  in  your  own  mind  what  trans- 
action is  back  of  each  entry. 


■  '■'■  "  Assignment  11,  Page  21 


The  column  "Amount"  is  totaled  at  the  end  of  the  month,  and  the 
total  is  posted  as  a  credit  to  the  Notes  Payable  Account  in  the  ledger. 
The  debits  are  made  to  Cash,  Creditor's  Account,  Purchases,  or  any  other 
proper  account. 

Note  Books  Used  as  Memorandum  Records.    Most  businesses,  however, 

prefer  to  use  the  notes  receivable  and  payable  books  merely  as  subsidiary 

records  for  reference  purposes  only.    In  such  a  case,  the  notes  are  entered 

.both  in  the  note  books  and  the  general  journal,  but  posted  item  by  item 

from  the  general  journal. 

Special  Columns  for  Notes.  If  special  columns  for  notes  are  used  in 
the  general  journal  and  cash  book,  it  is  well  to  have  a  special  column  in 
the  journal  for  notes  receivable  and  another  for  notes  payable.  This  pre- 
vents the  necessity  of  posting  each  note  separately,  since  the  total  of  each 
column  is  posted  at  the  end  of  the  month. 

It  may  also  be  desirable  to  have  a  special  column  for  notes  receivable 
on  the  receipt  side  of  the  cash  book  for  all  cash  received  on  notes  from 
customers,  and  a  column  for  notes  payable  on  the  disbursement  side  of 
the  cash  book  for  all  payments  on  notes  payable  to  creditors.  This,  how- 
ever, depends  upon  the  volume  of  such  transactions.  The  total  of  the  notes 
receivable  column  in  the  cash  book  is  posted  as  a  credit  to  the  Notes 
Receivable  Account,  and  the  total  of  the  notes  payable  column  is  posted 
as  a  debit  to  the  Notes  Payable  Account. 


Assignment  11,  Page  22 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  11 

The  following  problems  are  typical  of  situations  which  you  will  find  in 
actual  business.  The  problems  are  based  on  the  principles  explained  in 
the  discussion  of  this  assignment  and  it  is  essential,  therefore,  to  become 
thoroly  familiar  with  the  details  of  the  lesson  before  you  attempt  to  solye 
the  problems. 

1.  On  June  1,  1921,  the  B.  F.  Smith  Company  receives  a  promissory 
note  from  Robert  Brown,  one  of  its  customers,  for  $500.00,  payable  in 
60  days.    This  note  is  given  to  apply  on  Robert  Brown's  account. 

(a)  Set  up  the  note  in  proper  form,  and  fill  it  out  as  it  would  appear,  ready  to  be 
turned  over  to  the  B.  F.  Smith  Company. 

(b)  At  the  time  this  note  is  delivered  June  2,  1921,  what  entry  should  be  made 
on  the  books  of  B.  F.  Smith  Company? 

(c)  What  entries  are  made  on  the  books  of  Robert  Brown? 

2.  On  July  1,  the  B.  F.  Smith  Company  discounts  this  note  at  the 
First  National  Bank.    The  rate  of  discount  is  6  per  cent.       ,,'  \.a'  ^^.(, ..  . 

(a)  If  the  B.  F.  Smith  Company  indorses  this  note  "in  full,"  how  will;  the  indotse- 
ment  read?  .  _  ,         ,  . 

(b)  How  does  this  indorsement  affect  the  accounting  records? 

3.  At  the  time  of  discounting  this  note  at  the  bank, 

(a)  What  entry  is  made  on  the  books  of  B.  F.  Smith  Company? 

(b)  What  entry  is  made  On  the  books  of  the  ^baiik  ? 

4.  On  December  31,  1921,  Mr.  Green  receives  $197.00  from  the  bank 
at  the  time  of  discounting  his  own  $200.00  note,  payable  in  90  days — 

(a)  What  rate  of  discount  was  applied?     Show  calciiiatidn. 

(b)  What  entry  is  niiade  on  Mr,  Gre^fi'S  bookl'  at  the  tiiiie  6f  discounting  his  note  ? 

5.  Open  ledger  accounts  for  Cash,  Interest,  and  Discount,  Notes  Re- 
ceivable, Notes  Payable,  and  any  other  accounts  that  are  necessary  for 
the  following  transactions.  Journalize  the  transactions  first;  but  you  are 
not  required  to  send  in  the  journal  entries.  Send  in  the  ledger  accounts. 
In  these  accounts  enter  the  following  transactions : 

1921 
Sept.     1. — You  have  on  hand,  cash  $2,000.00,  and  notes  of  customers  $4,000.00.     Cus- 
tomers owe  you  $400.00  on  open  account.     You  also  owe  creditors  on  notes 

amounting  to  $3,000.00. 
Sept,     2. — Received  C.  Leonard's  check  for  $400.00  in  payment  of  his  60-day  note,  due 

to-day, 
Sept.    3.— Paid  A.  Kottler  $550.00  for  your  30-day  note,  due  to-day. 
Sept.     5.— Sent  check  for  $1,015.00  to  M.  Hogan  in  payment  of  90-day  note,  $1,000.00, 

and  interest  at  6  per  cent,  due  to-day. 
Sept.     7. — Received  from  Horace  George  a  check  for  $10.00,  two  months'  interest,  at 

6  per  cent,  due  to-day  on  his  note  of  $1,000.00. 
Sept.     8.— Discounted  at  the  bank,  William  Hodgeman's  90-day  note  of  $500.00,  dated 

July  8,  1921,  and  received  credit  for  the  proceeds.     Rate  of  discount  is  7 

per  cent.     We  indorsed  the  note  "in  full." 

Afesignmeirt  11  *  Page  23 


Sept.  12. — Received  at  its  present  value,  a  six-months'  promissory  note  for  $320.00 
from  R.  Williams,  to  apply  on  his  account.  Discount  rate  is  6  per  cent. 
The  note  is  dated  August  12,  and  bears  interest  at  5  per  cent.  It  is  in- 
dorsed in  full  by  the  maker,  F.  Webster. 

Sept.  15. — Paid  $30.00  to  Walter  Lane,  as  interest  for  six  months  due  to-day  on  your 
note  to  him  for  $1,000.00. 

Sept.  21. — Received  from  T.  Logan  $3.00,  six  months'  interest  on  his  note  of  $100.00. 

Sept.  22. — Borrowed  $1,000.00  from  the  bank  on  a  demand  note,  bearing  6  per  cent 
interest. 

Sept.  27.— Discounted  A.  Magill's  60-day,  $250.00  note  at  the  bank.  This  note  was 
issued  August  27,  bears  5  per  cent  interest,  and  is  discounted  at  6  per 
cent. 

Sept.  28. — Received  notice  that  J.  Francis  refused  to  pay  his  $300.00  note. 

Sept.  30. — Received  notice  from  the  bank  that  B.  Kendall's  note  for  $125.00,  left  with 

the  bank  for  collection,  has  been  collected  and  the  amount  credited  to  your 

account. 

Optional  Problems 

These  problems  are  given  in  order  that  you  may  have  additional 
practice  in  interest  calculation.  If  you  are  entirely  confident  that  you 
fully  understand  interest  and  discount  calculation  you  need  not  solve  them. 
If,  however,  you  are  the  least  bit  "rusty"  on  this,  we  suggest  that  solutions 
be  prepared  and  sent  in. 

Find  the  interest  on: 

1.  $650  for  110  days  at  6  per  cent 

2.  $125  for  312  days  at  7  per  cent 

3.  $3,155  for  37  days  at  5  per  cent 

4.  $920  for  3  months  at  7  per  cent 

5.  $7,500  for  dVz   months  at  5  per  cent, 

6.  $375.75  for  13  months  at  4Vs   per  cent 

Show  your  work  in  each  case  if  you  choose  to  send  in  solutions. 


Assignment  11,  Page  24 


Higher  Accountancy 

ai  ID 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  12 

DRAFTS,  TRADE  ACCEPTANCES  and 
BILLS  of  LADING 


''  I  'HE  successful  accountant  must  almost  instinctively 
-*-  sense  what  is  demanded  by  the  business  executive. 
This  is  a  most  important  qualification.  If  he  can  sue 
ceed  in  disclosing  the  contributing  causes  of  the  success 
or  possible  failure  of  a  business,  there  is  a  fertile  field  of 
operation  that  will  insure  a  reward  commensurate  with 
the  efforts  put  forth. 

H.  HOUGH 

Comptroller.  The  B.  F.  Goodrich  Co. 


LaSalle  Extension  University 

Chicago 


NHA.I2 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectable  Account.s 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21 .  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Overhead 

Distribution 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analyses  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


DRAFTS,  TRADE  ACCEPTANCES,  AND  BILLS  OF  LADING 

In  the  preceding  assignment,  we  mentioned  the  following  two  ways 
in  which  promissory  notes  facilitate  business  operations. 

1.  They  are  WRITTEN  EVIDENCES  of  indebtedness  and  are,  therefore,  pre- 
ferred to  open  accounts. 

2.  They  can  be  READILY  DISCOUNTED,  that  is,  sold  for  cash  or  for  credit, 
and  thus  additional  working  capital  can  be  secured  when  needed. 

Open  accounts  have  always  been  more  or  less  of  a  financial  problem, 
because  they  tie  up  a  large  amount  of  capital ;  not  only  are  they  uncertain 
as  to  time  of  payment,  but  they  often  involve  much  expense  before  they 
are  collected.  In  fact,  many  open  accounts  are  never  paid.  As  a  result, 
business  men  have  made  extensive  use,  not  only  of  promissory  notes,  but 
also  of  other  documents,  such  as  drafts  and  trade  acceptances,  for  the 
reason  that  a  debtor,  it  has  been  found,  attaches  more  importance  to  his 
obligations  where  there  is  some  physical  evidence  of  it  which  is  trans- 
ferrable. 

How  Drafts  Differ  from  Promissory  Notes.  A  draft  is  a  written  order 
by  one  person  to  another  person,  requiring  him  to  pay  a  certain  sum  of 
money  to  a  third  party.  It  differs  from  the  promissory  note  in  that  it  is 
an  order  to  pay,  instead  of  a  promise  to  pay.  There  are  three  parties  to 
a  draft:  the  drawer,  the  drawee,  and  the  payee.  Very  commonlj^  in  prac- 
tice the  draft  is  payable  to  "ourselves"  (see  Figure  12).  In  that  case  the 
drawer  and  the  payee  are  one  and  the  same  party. 

Various  Kinds  of  Drafts.  Drafts  may  be  classified  as  to  date  of  pay- 
ment into  two  groups,  sight  drafts  and  time  drafts.  A  sight  draft  states 
that  the  drawer  orders  the  drawee  to  pay  a  certain  sum  of  money  to  the 
payee  "at  sight."  This  means  that  the  holder  of  such  a  draft  can  present 
it  any  time,  like  the  holder  of  a  demand  note,  and  the  drawee  will  be 
expected  to  pay.  In  other  words,  the  debt  is  past  due  and  the  drawer 
wishes  it  paid  upon  presentation.  The  sight  draft  is  a  great  aid  in  collect- 
ing delinquent  accounts. 

The  time  draft  as  opposed  to  the  sight  draft,  specifies  a  fixed  or 
determinable  time  when  the  amount  is  to  be  paid.  For  example  a  time 
draft  drawn  "60  days  sight,"  means  "60  days  after  the  draft  has  been 
accepted  by  the  drawee."  "Sixty  days  after  date"  means  that  the  account 
is  payable  60  days  from  the  date  of  the  draft.  When  the  draft  has  been 
accepted  it  is  proper  to  refer  to  it  as  an  "acceptance."  This  is  in  accord 
with  modern  business  usage. 

Drafts  may  also  be  classified  as  "commercial"  or  "bank,"  depending 
upon  who  the  drawee  is.  If  one  person  draws  on  another  individual  to 
pay  a  third  party,  we  usually  call  the  draft  "commercial."  If  one  bank 
orders  another  bank  to  pay  a  certain  sum  of  money  to  a  third  party,  we 
speak  of  it  as  a  "bank  draft." 

(NHA-12) 
(9-12) 


Form  of  Draft.  Drafts  are  set  up  in  various  forms  according  to  the 
nature  of  the  transaction  and  the  terms  of  agreement.  Business  prac- 
tice, however,  has  adopted  more  or  less  standard  forms,  which  will  be 
reproduced  thruout  this  assignment. 

Assume  for  purposes  of  illustration  that  Ames  owes  $200.00  to  Clark, 
and  Bates  owes  Ames  $100.00. 

The  draft  as  drawn  by  Ames,  will  cancel  Bates'  indebtedness  entirely 
and  partly  cover  his  own  debt  to  Clark. 


The  Draft 

Figure  1.     In  this  draft  Ames  is  the  drawer;  Bates  is  the  drawee  or  payer,  and  Clark 

is  the  payee.     Note  where  the  name  of  each  party  appears  on  the  draft.     What  kind 

of  a  draft  is  this — sight  or  time,  commercial  or  bank? 

As  it  stands,  this  draft  is  merely  a  request  or  order.  It  does  not  bind 
Bates  to  pay  Clark,  hence  no  entry  should  be  made  on  the  books.  The  draft 
is  not  binding  until  Bates  writes  across  the  face,  "Accepted,  January  6, 
1922,"  and  signs  his  name  below. 

The  Accepted  Draft.  The  draft  as  it  now  appears  in  Figure  2  is  called 
an  accepted  draft  or  "acceptance."  By  accepting  the  draft,  Bates  obli- 
gates himself  to  pay  Clark  $100.00.  The  draft  is  now  virtually  the  same 
as  a  promissory  note,  because  Bates  promises  to  pay  a  fixed  amount  at 
a  determinable  time.  It  becomes  a  note  payable  to  Bates,  and  a  note  re- 
ceivable to  Clark.  If  Bates  does  not  pay,  then  Ames  is  expected  to  pay. 
In  other  words  Ames  has  a  contingent  liability,  just  as  if  he  were  the  first 
indorser  of  a  promissory  note. 

After  the  draft  is  accepted.  Bates  either  returns  it  to  Ames,  who 
passes  it  on  to  Clark,  or  Bates  sends  it  directly  to  Clark.  In  any  case, 
Clark  becomes  the  holder  of  the  draft  and  the  payee,  unless  he  in  turn 
transfers  it  to  another  party.  A  draft  may  thus  pass  thru  the  hands  of 
many  persons  before  maturity,  and  the  last  holder  then  becomes  the 
payee. 

Assignment  12,  Page  2 


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The  Accepted  Draft 
Figure  2.     Sixty  days  after  sight  means  60  clays  after  acceptance.     Hence,  it  is  neces- 
sary to  include  the  date  in  the  acceptance  written  across  the  draft. 

Entries  on  Books  for  Accepted  Draft.  Since  the  acceptance  of  a  draft 
represents  a  valid  business  transaction,  it  should  be  recorded  on  the  books 
of  the  various  parties  concerned.  The  entries  that  follow  record  the  facts 
for  each  step  of  the  procedure: 

1.  On  Books  of  Ames,  the  Drawer.  There  are  two  possible  ways  of 
making  the  entry  on  Ames'  books. 

(a)  The  customary  way,  which  is  incomplete. 

(b)  The  more  accurate  way. 

The  customary  entry  on  Ames'  books  would  cancel  in  part  Ames'  in- 
debtedness to  Clark,  and  cancel  entirely  Ames'  claim  on  Bates,  as  shown 
in  Figure  3. 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS 

1922 
Jan. 

6 

Clark 
Bates 

Bates  accepts  our  draft  to  pay  Clark 

100 

00 

100 

00 

Entry  for  Accepted  Dr.-vft 

Figure  3,     This  entry  is  very  commonly  made,  but  it  is  incomplete  because  it  does  not 

bring  Ames'  contingent  liability  on  the  books.     There  will  be  nothing  to  show  that 

Ames  will  have  to  pay  Clark  if  Bates  fails  to  pay. 

A  more  accurate  method  is,  therefore,  desirable,  because  it  shows  the 
contingent  liability,  and  analyzes  the  transaction  more  clearly  step  by  step. 

1.     When  Bates  accepts  the  draft. 


Assignment  12,  Page  3 


1922 

Jan. 

6 

Notes  Receivable 

Bates 
Bates  accepts  our  draft 

100 

00 

100 

00 

Another  Method  of  Recording  Accepted  Draft 

Figure  4.  When  Bates  accepts  the  draft,  the  draft  becomes  a  note  payable  for  Bates. 
In  other  words  it  amounts  to  the  same  thing  as  if  Bates  were  to  give  Ames  his  own 
note.  That  is  why  Notes  Receivable  Account  is  debited  by  Ames.  Bates'  account  is 
credited,  because  his  indebtedness  to  Ames  on  open  account  is  settled  by  the  accepted 

draft. 

2.  When  the  accepted  draft  is  received  by  Clark.  As  soon  as  the  ac- 
cepted draft  is  transferred  to  Clark,  Ames'  debt  to  Clark  is  reduced  by 
$100.00  (the  original  debt  was  $200.00),  and  Ames  assumes  a  contingent 
liability.     Hence  the  entry  in  Figure  5. 


1922 
Jan. 

7 

Clark 

Notes  Receivable  Discounted 

To  show  contingent  liability  assumed  when 
Clark  receives  our  draft  accepted  by  Bates. 

100 

00 

100 

00 

Figure  5 — Entry  When  Accepted  Draft  Is  Received 

3.  Entries  on  books  of  Bates,  the  drawee.  When  Bates  accepts  the 
draft,  his  debt  to  Ames  is  canceled,  but  in  place  of  it,  another  liability  is 
assumed,  which  is  virtually  the  same  as  a  note  payable.  The  entry  in 
Figure  6  should  therefore  be  made  on  Bates'  books. 


1922 
Jan. 

6 

Ames 

Notes  Payable 

To  cancel  debt  to  Ames  and  record  new  lia- 
bility to  Clark,  assumed  by  accepting 
Ames'  draft. 

100 

00 

100 

00 

Figure  6 — Entry  by  Drawee 

4.  Entries  on  books  of  Clark,  the  payee.  When  Clark  receives  the 
accepted  draft,  he  acquires  a  new  asset,  and  his  claim  on  Ames  is  reduced 
by  $100.00.     Accordingly,  Clark  will  make  the  entry  of  Figure  7. 


Assignment  12,  Page  4 


1922 
Jan. 

7 

Notes  Receivable 

Ames 

Received  draft  accepted  by  Bates, 
on  account  for  Ames. 

to  apply 

100 

00 

100 

GO 

Figure  7 — Entry  by  Payee 

Entries  Necessary  When  Draft  Is  Paid.  We  will  now  assume  that 
Bates  pays  Clark  $100.00  on  March  6,  1922.  When  he  pays  this  to  Clark, 
Bates  makes  an  entry  in  his  cash  disbursement  book,  from  which  the 
item  will  be  posted  as  a  debit  to  the  Notes  Payable  Account. 

On  Clark's  records,  the  receipt  of  $100.00  will  be  entered  in  the  cash 
receipts  book,  and  posted  as  a  credit  to  the  Notes  Receivable  Account. 

Ames'  records  will  also  be  affected  when  Bates  pays  Clark  $100.00, 
since  the  contingent  Kability  now  ceases  to  exist  for  Ames.  If  Ames 
receives  no  notice  within  a  reasonable  time  after  the  date  of  maturity, 
to  the  effect  that  Bates  refuses  payment,  Ames  is  justified  in  taking  the 
contingent  liability  from  his  books.  The  entry  of  Figure  8  will  therefore 
be  made  on  Ames'  books. 


1922 
Mar. 

8 

Notes  Receivable  Discounted 

Notes  Receivable 

Bates  paid  Clark  SIOO.OO  on  the  draft 
accepted  Jan.  6,  1922. 

100 

00 

100 

00 

Figure  8 — Entry  ry  Drawer  When  Draft  Is  Paid 

What  Entries  Are  Made  in  Case  the  Draft  Is  not  Paid  by  Drawee.    In 

case  Bates  refuses  to  pay  Clark  on  March  6,  1922,  entries  are  made  in 
the  same  way,  as  explained  in  Assignment  11,  page  9,  for  dishonored 
notes.    Briefly  stated,  the  following  entries  are  necessary. 

1.    On  the  books  of  Clark,  the  payee,  as  given  in  Figure  9. 


1922 

Mar. 

6 

Ames  or  Dishonored  Notes 
Notes  Receivable 

100 

00 

100 

00 

Bates  refuses  to  pay  Mr.  Ames' 

draft. 

Figure  9 — Entry  by  Payee  When  Draft  Is  Dishonored 

2.     On  the  books  of  Ames  when  he  pays  Clark. 

If  Ames  pays  Clark  $100.00  on  March  6,  1922,  Ames  will  make  the 
following  entries: 


Assignment  12,  Page  5 


(a)  In  the  cash  disbursements  book,  he  will  enter  the  $100.00  cash 
payment.  From  the  cash  book,  the  item  will  be  posted  as  a  debit  to  the 
Notes  Receivable  Discounted  Account,  since  the  contingent  liability  has 
now  become  a  real  liability. 

(b)  Ames  will  now  look  to  Bates  for  payment,  and  will  therefore 
make  the  entry  in  the  journal  of  Figure  10. 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS 

1922 
Mar. 

7 

Bates 

Notes  Receivable 

To  record  the  claim  on  Bates,   on  account 
of  refusal   to  pay  draft  to  Clark 

100 

00 

100 

00 

Figure  10 — Entry  by  Drawer  When  Draft  Is  Dishonored 

Entries  for  Discounted  Drafts.  Drafts  that  are  negotiable  can  be 
transferred  by  indorsement  from  one  party  to  another,  just  like  negotiable 
notes,  as  explained  in  Assignment  11. 

If  we  assume  that  Clark,  for  example,  takes  this  draft  to  the  bank  on 
January  21,  he  will  receive  the  proceeds,  i.e.,  the  face  value  of  the  draft, 
$100.00,  less  interest  for  45  days,  or  from  January  21  to  March  6.  If  the 
rate  of  discount  is  6  per  cent,  Clark  will  receive  $99.25. 

He  will  make  the  entry  in  his  cash  book,  reproduced  in  Figure  11. 

Cash  Book  (Receipts) 


DATE 

L.F. 

Account 
Credited 

Explanation 

General 

Ledger 

Cr. 

Accounts 

Receivable 

Cr. 

Net 
Cash 

Total 

1922 

Jan. 

21 

Notes  Receivable 
Discounted 

*Interest  and 
Discount 
*  Entry  in  Red  Ink 

Draft  from 
Mr.   Bates 

100 

00 
75 

99 

25 

Figure  11 — Entry  for  Discounted  Draft 

When  Bates  pays  the  bank  at  maturity,  both  Ames  and  Clark  will 
cancel  their  contingent  liability  by  the  same  entry  as  was  shown  in  Fig- 
ure 8. 

Commercial  Draft  Payable  to  Drawer's  Own  Ordo'.  In  the  time 
draft  given  above  three  different  persons  were  involved:  Ames  drew  on 
Bates  in  favor  of  Clark,  and  the  draft  is  not  payable  until  March  6,  1922. 
Drafts  frequently  are  used  for  collection  purposes,  involving  two  persons, 


Assignment  12,  Page  6 


one  of  whom  represents  two  parties.  In  such  a  case,  the  drawer  will  or- 
der another  party  to  pay  a  certain  amount  to  himself,  as  illustrated  by 
the  following  draft,  or  as  frequently  happens,  to  the  drawer's  bank.  The 
draft  is  a  commercial  sight  draft  and  appears  as  shown  in  Figure  12. 


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Commercial  Dr.\ft  to  Pay  Oneself 

Figure  12,     A.  Merchant  &  Co.  is  both  the  drawer  and  the  payee,  and  A.  Customer  is 
the  drawee.     A.  Merchant  &  Co.  will  probably  deliver  this  draft  to  its  bank  for  col- 
lection.    The  bank  will  then  present  the  draft  to  A.  Customer  for  payment. 

Usually  the  drawee  will  arrange  to  pay  such  a  draft  immediately  upon 
presentation  to  avoid  any  impairment  of  his  credit.  The  bank  will  charge 
a  small  amount,  to  cover  collection  charges,  and  credit  A.  Merchant  &  Co. 
with  the  balance. 

Entries  for  the  sight  draft  are  not  made  until  the  draft  is  actually  paid. 

Trade  Acceptances.  Now  that  you  understand  the  meaning  of  the 
term  "acceptance,"  namely,  a  draft  accepted  by  the  drawee,  it  will  not 
be  difficult  for  you  to  understand  what  is  meant  by  trade  acceptances, 
which  are  becoming  very  popular  among  business  men.  A  trade  accept- 
ance is  an  acknowledgement  of  a  debt  by  the  buyer  in  favor  of  the  seller, 
for  merchandise  that  the  seller  had  placed  in  the  hands  of  the  buyer;  in 
other  words,  acceptances  arising  out  of  a  sale  of  commodities  are  known  as 
trade  acceptances.  Most  European  countries  have  been  using  trade  accept- 
ances for  a  long  time,  and  now  they  are  also  being  extensively  used  in  the 
United  States. 

Purpose  of  Trade  Acceptances.  Trade  acceptances  make  it  possible  to 
eliminate  to  a  great  extent  the  undesirable  open  accounts.  They  provide 
a  surer  method  of  collection.  They  ratify  the  sale  of  merchandise  and 
thus  prevent  any  disputes,  either  as  to  the  amount  or  the  date  of  pay- 
ment. They  are  considered,  according  to  the  Federal  Resei*ve  Act,  a  pre- 
ferred class  of  commercial  paper,  and  are  discounted  at  a  lower  rate.  They 
insure  more  prompt  payment  by  the  purchaser,  because  he  values  his 
credit  standing  with  the  bank  much  more  highly  than  his  credit  on  open 
account  with  an  individual  or  business. 

Assignment  12,  Page  7 


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Figure  13.     This  is  a  time  draft,  which,  when  accepted  and  given  in  exchange  for  a 
commodity,  is  spoken  of  as  a  trade  acceptance. 

Accounting  Procedure  for  Trade  Acceptances.  The  entries  to  be  made 
are  the  same  as  for  accepted  time  drafts  explained  on  page  4.  The 
trade  acceptance  becomes  a  note  receivable  to  the  seller,  and  a  note  pay- 
able to  the  buj^er.  When  many  trade  acceptances  are  issued  and  received 
it  is  probably  better  to  record  the  acceptances  in  special  accounts,  called 
Trade  Acceptances  Receivable  and  Trade  Acceptances  Payable,  instead  of 
the  Notes  Receivable  and  Notes  Payable  accounts. 

Especially  is  this  desirable,  so  that  the  amount  of  Trade  Acceptances 
Receivable  may  be  shown  as  a  separate  item  on  the  balance  sheet.  Bankers 
pay  considerable  attention  to  the  amount  of  Trade  Acceptances  Receiv- 
able on  a  balance  sheet,  as  compared  with  Accounts  Receivable,  because 
from  this  comparison  the  banker  can  usually  determine  whether  or  not  a 
business  is  employing  sound  credit  policies. 

Another  reason  for  keeping  trade  acceptances  in  a  separate  account 
from  other  kinds  of  drafts  and  notes,  is  that  the  trade  acceptances  repre- 
sent obligations  from  the  date  of  sale,  while  the  ordinary  time  drafts  and 
notes  may  represent  only  a  change  in  the  evidence  of  an  obligation.  That 
is,  the  obligation  may  have  been  an  open  account  which  is  now  settled  by 
a  note  or  draft — merely  a  change  in  the  physical  evidence  of  the  debt. 

Special  books  may  also  be  used  for  trade  acceptances  similar  to  the 
notes  receivable  and  notes  payable  books.  These  records  would  be  called 
trade  acceptances  payable  and  trade  acceptances  receivable  books,  and  may 
be  used  as  posting  mediums  if  so  desired. 

If  discounts  are  allowed,  special  columns  may  be  included.  In  fact, 
three  money  columns  would  be  necessary.  For  example,  in  the  trade  ac- 
ceptances receivable  book,  these  three  columns  would  appear:  Sales 
Ledger  Account  Credit,  Sales  Discounts  Debit,  and  Trade  Acceptances 
Receivable  Debit. 

In  the  trade  acceptances  receivable  book  are  recorded  all  trade  accept- 
ances which  have  been  sent  to  customers  and  returned  properly  accepted. 


Assignment  12,  Page  8 


In  the  trade  acceptances  payable  book  are  recorded  all  other  accept- 
ances which  have  been  received  from  creditors  and  returned  to  them  prop- 
erly accepted. 

Bills  of  Lading  with  Sight  Draft  Attached.  Another  convenient  in- 
strument intended  to  facilitate  collection,  is  the  bill  of  lading  with  sight 
draft  attached.  For  example,  an  order  may  be  received  from  a  customer 
who  has  a  poor  credit  standing,  or  who  may  be  a  new  customer  and  wishes 
the  goods  delivered  to  him  before  his  credit  can  be  looked  up. 

In  such  a  case  the  shipper  sends  the  invoice  directly  to  the  customer, 
and  sends  an  order  bill  of  lading  with  sight  draft  attached  to  his  own  bank 
for  collection. 

Then  the  bank  sends  the  draft  and  bill  of  lading  to  a  bank  in  the  city 
where  the  purchaser  lives.  It  is  necessary,  however,  that  the  shipper's 
bank  indorse  the  bill  of  lading  and  draft  before  sending  it  to  the  buyer's 
bank.  When  this  bank  receives  the  bill  of  lading  and  draft,  it  sends  a 
notice  to  the  consignee  requesting  payment.  The  buyer  then  goes  to  his 
bank,  pays  the  draft,  and  receives  the  receipted  draft  and  the  order  bill 
of  lading,  which  upon  being  properly  indorsed  entitles  him  to  receive  the 
goods. 

The  order  bill  of  lading  makes  it  possible  for  the  seller  to  retain  con- 
trol over  the  goods  until  the  buyer  actually  pays  for  them  at  delivery,  and 
at  the  same  time  provides  a  convenient  and  sure  method  of  collection.  It 
also  benefits  the  customer,  since  it  makes  possible  a  quick  delivery  of 
goods,  without  delay  on  account  of  looking  up  credit. 

Commercial  Paper  Considered  Same  As  Cash.  The  accountant  should 
also  be  familiar  with  various  kinds  of  commercial  paper  that  are  accepted 
by  the  bank  as  money. 


WILBUR  LUMBER  GO.       ^-^^^ 

Waukesha,  Wis.  Jan.   2  iq22 

Pay  to  the  order  of     Southern  Mills  Co. ($257.29) 

Two  hundred  fifty-seven  and 29/100  Dollars 

To  FIRST  NATIONAL  BANK  Wilbur  Lumber  Co. 


WAUKESHA,  WIS.  gy  H .    WllbuF,    President 


The  Check 

Figure  14.    In  this  check  the  Wilbur  Lumber  Co.  is  the  drawer,  the  Southern  Mills  Co. 
is  the  payee,  and  the  First  National  Bank  is  the  drawee. 

Assignment  12,  Page  9 


Cash  means  more  than  currency.  It  includes  checks,  bank  drafts,  ex- 
press money  orders,  travelers'  checks  and  postal  money  orders,  cashier's 
checks,  etc.,  all  of  which  are  used  extensively  in  business. 

When  any  of  these  instruments  are  used  in  business  transactions,  the 
accountant  should  consider  them  as  cash,  and  record  them  in  the  Cash 
Account. 

They  are,  however,  in  their  essentials  very  similar  to  the  ordinary 
sight  draft.  A  check,  for  example,  is  a  draft  on  a  depository  bank  to  pay 
another  party,  as  is  evident  from  Fig.  14  illustrating  a  check. 

The  certified  check  is  the  same  as  those  shown  in  Figures  14  and  15, 
except  that  it  carries  the  certification,  by  the  bank's  cashier,  that  the 
check  is  good,  and  the  bank  will  hold  the  amount  specified  on  the  check 
until  presentation  of  the  check  for  payment. 

The  certified  check  usually  bears  this  or  a  similar  certification. 


Accepted 
First  National  Bank 

E.   Jacobs, 

Cashier, 


A  cashier's  check  is  a  check  drawn  by  the  bank  upon  itself,  in  favor 
of  some  person  or  business. 

The  Wilbur  Lumber  Company  could  have  used  the  cashier's  check 
in  Figure  15. 


w 
o 

I— ( 

en 


No.  124 


Waukesha,  Wis.,    Jan.    2,    1922 


The  First  National  Bank 


Pay  to  the  order  of      Southern  Mills  Co. 

Two  hundred  fifty-seven  and 29/100  Dollars 

$257.29  E.  Jacobs 


Cashier 


Figure  15 — Cashier's  Check 

Another  kind  of  business  paper  considered  the  same  as  cash,  is  the 
bank  draft.  Bank  drafts  are  checks  drawn  by  one  bank  on  another;  in 
other  words  they  are  in  the  form  of  sight  drafts,  payable  upon  presenta- 
tion by  the  holder.  A  bank  draft  could  have  been  used  by  the  Wilbur 
Lumber  Company,  as  shown  in  Figure  16. 


Assignment  12,  Page  10 


The  First  National  Bank 

Waukesha,  Wis  ,     January  2,    1922         No.   m 

Pay  to  the  order  of  Southern  Mills  Co. $257 . 29 

Two  hundred  fifty-seven  and 29/100  noHars 

To  FIRST  NATIONAL  BANKf   E.   Jacobs 

MILWAUKEE,  WIS.  )  Cashier 


Figure  16 — The  Bank  Draft 

There  are  several  other  kinds  of  commercial  paper  commonly  used  in 
place  of  cash,  such  as  express  money  orders,  travelers'  checks,  and  postal 
money  orders.  They  are  ordinarily  used  as  convenient  means  of  sending 
money  to  parties  in  another  city.  You  are  probably  familiar  enough 
with  these  instruments  so  that  we  do  not  need  to  illustrate  them  here. 
It  is  well,  however,  to  note  their  relation  to  drafts  and  checks. 

The  express  money  order  is  a  check  issued  by  an  express  company. 
It  is  an  order  on  the  express  office  in  the  city  to  which  it  is  sent  to  pay 
a  fixed  amount  to  a  certain  party. 

The  traveler's  check  is  an  instrument  developed  by  the  Bankers' 
Association,  and  is  similar  to  the  express  money  order,  except  that  the 
order  is  drawn  on  a  bank  in  New  York  City.  Only  those  banks  holding 
membership  in  the  Bankers'  Association  are  permitted  to  issue  such 
orders. 

The  postal  money  order  is  similar  to  the  express  and  bank  orders,  the 
difference  being  that  the  local  postmaster  issues  the  order  upon  written 
application  by  the  sender,  the  order  being  good  for  a  specified  amount  at 
another  post  office. 

SUMMARY  OF  IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

At  this  time,  it  is  desirable  to  sum  up  briefly  the  most  important 
principles  of  this  assigmiient. 

First.  There  are  certain  essential  differences  between  drafts  and  notes. 
Drafts  are  orders  to  pay.  Notes  are  promises  to  pay.  Drafts  always 
involve  three  parties,  two  of  which,  however,  in  some  cases  may  be 
the  same  person,  while  notes  never  involve  more  than  two  parties. 

Second.    Various  kinds  of  drafts  have  been  presented,  viz.: 

Time  drafts,  i.e.,  orders  to  pay  at  some  fixed  or  determinable  future 
time. 

Assignment  12,  Page  11 


Sight  drafts,  those  payable  on  presentation,  like  demand  notes. 

Commercial  drafts,  which  are  used  by  individuals  and  business  houses 
in  settlement  of  open  accounts  or  financial  debts. 

Bank  drafts — those  drawn  by  one  bank  upon  another  bank,  in  trans- 
ferring money  to  parties  in  another  city. 

Third.  Formal  acceptance  is  necessary,  in  the  case  of  time  drafts,  to 
make  them  binding.  Sight  drafts  are  usually  paid  on  presentation, 
without  formal  acceptance. 

Fourth.  In  accounting  for  drafts,  certain  points  are  important  to  keep 
in  mind.  Time  drafts  are  not  recorded  until  accepted.  The  drawer's 
contingent  hability  should  be  set  up  on  the  books,  when  the  time  draft 
has  been  accepted  and  transferred  to  the  payee.  Discounted  drafts 
are  recorded  like  discounted  notes.  Sight  drafts  are  not  recorded  on 
the  books  until  they  are  paid. 

Fifth.    Commercial  paper  used  in  place  of  cash: 

Checks,  bank  drafts,  express,  postal  orders  and  travelers'  checks. 

These  instruments  are  essentially  orders  to  pay  and  are,  therefore, 
very  similar  to  ordinary  drafts. 

They  are  considered  as  cash,  and  so  recorded  on  the  books. 

Importance  of  Applying  These  Principles.  Thruout  the  assignment 
several  illustrations  have  been  presented  in  which  certain  fundamentals 
regarding  drafts,  acceptances,  etc.,  have  been  presented. 

The  problems  that  follow  will  serve  as  a  practical  test  of  your  knowl- 
edge of  these  principles.  They  emphasize  the  necessity  of  being  familiar 
with  all  forms  of  negotiable  paper.  The  accountant  is  expected  to  recog- 
nize the  significance  of  each  document  and  determine  the  nature  of  the 
transaction  represented  by  each,  so  that  he  can  make  proper  entries  on 
the  books. 


Assignment  12,  Page  12 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  12 

1.  A  draws  a  time  draft  30  days  after  sight  on  B  for  $300.00,  payable  to 
C.  The  draft  is  dated  January  2,  1922,  and  is  accepted  by  B  on  Jan- 
uary 4,  and  transferred  to  C  on  January  5.  Give  entries  on  the  books 
of  A,  B,  and  C. 

2.  Give  entries  on  the  books  of  A,  B,  and  C  at  the  time  of  payment, 
assuming  that  B  pays  C. 

3.  What  entries  are  necessary,  assuming  that  B  refuses  to  pay  and  A 
pays  C? 

4.  On  February  1,  1922,  Mr.  Clark,  of  Chicago,  purchases  the  following 
items  from  the  Central  Furniture  Company,  of  Grand  Rapids,  Mich., 
on  time  draft,  30  days  after  date: 

1  Desk  @  $98.50 

2  Chairs  @     18.50 

3  Filing  cases  @     25.00 
6  Desk  lamps    @       9.00 

Set  up  the  draft  as  it  would  appear  after  he  has  accepted  it  on  Feb- 
ruary 3.    What  is  this  draft  called  after  he  accepts  it? 

5.  On  February  5  the  Central  Furniture  Company  discounted  the  draft 
at  6  per  cent  with  the  First  National  Bank. 

How  much  cash  did  the  Central  Furniture  Company  receive? 

Give  entries  on  the  books  of  the  Central  Furniture  Company  at  time 
of  discount. 

6.  State  what  kind  of  business  papers  would  be  used  for  the  following 
transactions,  and  in  what  books  of  original  entry  the  transactions 
would  be  recorded.    Assume  that  your  business  is  located  in  Chicago. 

(a)  Borrowed  $5,000.00  from  bank. 

(b)  Received  $400.00  note  from  customer. 

(c)  Paid  $1,000.00  note  to  C.  Walters,  with  3  months'  interest  at  6  per 
cent.    Mr.  Walters  lives  in  San  Francisco. 

(d)  Received  payment  from  F.  Jones  in  settlement  of  an  open  account. 
The  balance  in  his  personal  account,  as  it  appears  in  the  customers' 
ledger,  stands  at  $412.00,  and  a  2  per  cent  cash  discount  is  allowed 
for  prompt  payment. 

(e)  You  have  received  a  bank  draft  for  $72.00  from  S.  Goldman,  in  pay- 
ment of  his  account.  You  decide  to  use  the  same  draft  in  paying 
your  account  with  the  Western  Electric  Company. 


Assignment  12,  Page  13 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assig,nment  13 

AUXILIARY  CASH  RECORDS 


T  AM  thoroly  convinced  that  accountancy,  a  compara- 
■^  tively  new  profession,  is  the  least  crowded  of  all  the 
professions,  and  that  it  offers  a  substantial  reward  for 
those  who  are  qualified. 

DOUGLAS  WILSON 

Chairman,  State  Board  of  Examiners 
in  Accountancy,  Montana 


LaSalle  Extension  University 

Chicago 


NHA  13 
(11-222) 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectable  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Overhead 

Distribution 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analyses  of  Financial  Statements — General  Review 

Copyright,  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


AUXILIARY  CASH  RECORDS 

PETTY  CASH— BANK  RECONCILIATION  STATEMENT 

In  your  study  of  accounting  thus  far,  you  have  seen  how  accounting 
records  are  expanded  so  as  to  meet  the  needs  of  a  gi'owing  business.  For 
example,  the  journal  is  broken  up,  the  ledger  is  subdivided,  and  financial 
statements  are  expanded.  The  principle  that  underlies  all  this  expansion 
is  the  principle  of  classification. 

It  is  this  same  principle  that  underlies  the  expansion  of  the  cash  rec- 
ords discussed  in  this  assigmnent.  In  any  business,  large  or  small,  the 
inain  cash  records,  as  you  know,  are  the  cash  book  and  the  Cash  Account. 
There  are,  however,  other  papers  and  records  on  which  some  of  the  cash 
transactions  are  recorded.  These  papers  and  books  are  called  auxiliary 
records,  because  they  serve  to  collect  details,  which  are  later  summarized 
in  the  cash  book  and  the  Cash  Account.  Briefly  stated,  these  auxiliary 
cash  records  help  to  make  the  main  records  more  complete. 

The  Petty  Cash  Fund.  Such  auxiliary  cash  records  are  especially 
valuable  when  a  business  has  several  cash  funds.  Most  business  houses 
have  numerous  small  disbursements,  such  as  postage,  car  fare,  telegraph, 
freight,  and  express  expenses,  etc.  To  issue  a  check  for  each  of  such 
items  would  obviously  require  considerable  extra  work  and  time.  Business 
men  therefore  find  it  convenient  to  set  aside  out  of  the  general  cash  a 
special  cash  fund  for  these  small  payments. 

Whenever  a  separate  fund  is  kept  for  small  payments,  a  special  cash 
book  is  also  used,  called  the  Petty  Cash  book.  It  is  so  called  because  only 
small  or  "petty"  cash  transactions  are  recorded  in  it. 

The  petty  cash  book  then  bears  the  same  relation  to  the  small  fund  that 
the  general  cash  book  bears  to  the  general  cash  fund.  The  general  fund 
is  usually  kept  in  a  bank  or  general  cash  drawer  or  both.  The  petty  cash 
is  usually  kept  in  a  petty  cash  drawer  in  the  office,  entirely  separate  from 
the  general  cash,  and  in  the  larger  concerns  the  petty  cash  fund  is  placed 
in  the  custody  of  a  petty  cashier. 

Form  of  Petty  Cash  Book.  The  Petty  Cash  book  is  usually  ruled  some- 
what similar  to  the  one  in  Figure  1.  The  use  of  special  columns  facilitates 
the  distribution  of  charges  to  the  various  accounts  affected,  as  the  sorting 
of  the  items  is  done  largely  at  the  time  of  making  the  entry.. 

Handling  the  Petty  Cash  Fund.  The  Petty  Cash  fund  may  be  handled 
in  one  of  three  ways : 

r.  It  may  be  reimbursed  from  time  to  time  with  an  amount  equal  to 
the  amount  spent  out  of  it  since  its  last  reimbursement.  This  is  called  the 
"imprest"  system,  and  is  considered  far  more  desirable  than  any  other 
method  for  meeting  petty  payments. 

NHA-13 


PETTY  CASH  DISBUKi3EMENTS  for  March  1922                                                                                                   Paid  by  Check  Ho.   515 

Disbursements 

Uistribution                                                                                           1 

Date 

Items 

Amount 

General 

Expense 

Office 
Expense 

Shipping 
Expense 

Advertis- 
ing 

Postage 

Telephone 

and 
Telegraph 

Car 

Fare 

Donation 

Miscellaneous 

Aceount 

Amount 

March 

13 
14 
14 
14 
15 
15 
15 
15 
16 
16 
16 

Broughl  Forward 
475-lc  Stamps 
1  Doz.   Pencils 
Car  Fare 
Salvation  Army 
Western  Dnioa 
Cleaning  Windows 
Package 
Car  Pare 
100  Booklets 
1  Car  Fare 

21 
4 

1 

1 

2 
1 

4 

00 
75 
20 
20 
00 
55 
50 
25 
12 
75 
12 

3 
2 

00 
50 

1 

1 

75 
20 

2 

1 

00 
26 

4 
4 

00 
75 

8 

76 
55 

1 

49 
20 

12 
12 

1 

00 

Sales 

4 

75 

The  Petty  Cash  Book 

Figure  1.    This  petty  cash  book  contains  several  typical  transactions  of  a  minor  nature. 

Note  how  the  amounts  are  distributed  in  special  columns.     At  the  end  of  March  these 

columns  are  added,  and  the  totals  can  be  posted,  with  a  great  saving  of  time. 

2.  It  may  be  reimbursed  by  round  amounts  of  sufficient  size  to  meet 
the  ordinary  demands  made  upon  it. 

3.  It  may  be  reimbursed  for  any  amount  at  any  time,  regardless  of 
whether  or  not  the  fund  is  nearly  exhausted.  This  last  method  is  very 
undesirable  and  causes  much  waste  of  time  in  checking  or  balancing  the 
cash  funds. 

HOW  IMPREST  SYSTEM  OPERATES 

1.  When  Fund  Is  Established.  The  person  in  charge  of  the  petty  cash 
fund  receives  a  check  from  the  general  fund  for  a  "round"  amount  as  $25, 
$50,  $100,  $500,  or  other  amount,  depending  on  the  requirements  of  the 
business.  If  possible,  the  fund  should  be  sufficient  to  meet  all  petty  cash 
expenditures  for  a  period  of  at  least  two  weeks  on  the  average.  In  the 
general  cash  book,  disbursement  side,  an  entry  is  made  for  the  check  so 
issued,  charging  Imprest  Cash  Fund,  Petty  Cash,  or  the  petty  cashier 
himself.  In  the  latter  case,  the  separate  account  opened  in  the  general 
ledger  should  not  be  mingled  with  any  other  debit  or  credit  to  the  party 
in  question.  The  check  itself  is  made  payable  to  Petty  Cash  or  to  X  for 
Petty  Cash. 

The  petty  cash  clerk,  upon  receipt  of  such  check,  will  make  an  entry 
in  his  petty  cash  book  to  show  the  amount  received.  As  payments  are 
made  from  the  petty  cash,  receipts  or  vouchers  are  put  into  the  drawer 
for  the  amounts  of  such  payments.  At  any  time,  then,  one  should  be 
able  to  find  in  the  petty  cash  drawer  the  total  original  amount  put  in. 
Such  amount,  however,  would  usually  consist  in  part  of  petty  cash  receipts 
and  in  part  of  money.    This  is  one  of  the  advantages  of  the  imprest  system 


Assignment  13,  Page  2 


from  an  auditing  point  of  view.    Appropriate  entries  for  all  disbursements 
should  be  made  in  the  petty  cash  book. 

2.  When  Fund  Is  Reimbursed.  When  the  custodian  of  the  fund  finds 
the  amount  so  small  that  it  will  meet  only  two  or  three  more  days'  pay- 
ments, he  should  place  his  cash  receipts  or  vouchers  in  order,  balance  his 
petty  cash  book,  and  summarize  the  receipts  on  a  sheet  of  paper  for  filing 
purposes.  This  list  and  the  vouchers  should  be  presented  to  the  financial 
officer  or  general  cashier,  who  will  issue  a  check  for  the  amount  of  the 
disbursements  shown  on  the  list.  The  proceeds  of  this  check  are  placed 
in  the  petty  cash  drawer,  again  restoring  the  amount  of  money  in  it  to  the 
original  $25,  $50,  $100,  or  $500,  as  the  case  might  be.  The  petty  cash 
vouchers  are  filed  away  with  the  list  and  serve  as  a  complete  voucher  for 
the  entry  in  the  general  cash  book. 

The  petty  cash  book  may  or  may  not  be  used  as  a  posting  medium.  If 
it  is  not  so  used,  posting  may  be  made  either  from  the  journal  or  general 
cash  book. 

Postings  from  Petty  Cash  Book.  In  the  simple  form  of  the  petty  cash 
book,  it  is  necessary  to  make  a  summary  of  expenditures  each  time  the 
book  is  balanced.  This  summary  is  recorded  below  the  rulings  and  is 
made  to  correspond  with  the  account  titles  for  which  expenditures  are 
incurred,  as  postage,  stationery,  freight  and  express,  or  other  account 
titles  used  in  the  general  ledger. 

These  totals  are  then  posted  as  debits  to  the  respective  ledger  accounts. 
No  account  is  credited  from  the  petty  cash  book.  The  offsetting  credit  is 
to  Cash  Account  as  expressed  in  the  general  cash  book. 

In  the  example  below,  $88.20  is  posted  to  the  debit  side  of  several 
expense  accounts  from  the  petty  cash  book,  but  no  credit  is  posted  from 
the  same  book.  On  the  other  hand,  $88.20  is  credited  to  (General)  Cash 
Account  from  the  cash  book,  but  no  debit  is  posted  from  the  same  book 
to  offset  it.  The  net  result,  of  course,  is  that  the  several  expense  accounts 
are  debited  and  General  Cash  Account  credited  with  the  amount  of  the 
petty  expenditures. 

Postings  from  Journal.  When  postings  are  made  from  the  journal 
instead  of  from  the  petty  cash  book,  the  entry  is  made  in  the  journal 
at  the  time  the  petty  receipts  are  presented  for  reimbursement.  The 
entry  to  be  made  is  reproduced  in  Figure  2. 

In  addition  to  the  entry  made  in  the  journal,  an  entry  is  made  in  the 
general  cash  book  when  the  check  is  issued  to  reimburse  the  fund.  Such 
entry  is  made  almost  simultaneously  with  the  one  in  the  journal  and 
expresses  this  debit  and  credit: 

Petty  Cash  Fund $88.20 

Cash  ( General ) _...._ _ _ $88.20 

The  net  result  of  the  two  entries  is  a  debit  to  the  several  expense 
accounts  and  a  credit  to  Cash,  since  the  debit  and  credit  to  the  Petty  Cash 

Assignment  13,  Page  3 


Account  cancel  each  other.  It  should  be  observed  that  this  is  the  same 
result  which  was  obtained  when  the  posting  was  made  from  the  petty  cash 
book. 

JOURNAL 


DATE 

L.F. 

EXPLANATION 

DEBITS 

CREDITS 

Postage 

$  5 

00 

Stationery 

15 

30 

Freight  and  Express 

40 

65 

Telephone  and  Telegraph 

13 

90 

Selling  Expense 

13 

35 

Petty  Cash  Fund 

$88 

20 

Journal  Entries  for  Petty  Cash  Items 

Figure  2.  By  entering  these  transactions  in  the  general  journal  as  shown  in  Figure  2, 
we  save  space  in  the  cash  book,  which  is  quite  desirable.  The  summary  entry  in  the 
cash  book  then  requires  but  little  space.  Thus  you  can  see  what  we  mean  when  we  say 
that  the  petty  cash  book  is  an  auxiliary  cash  record.  It  contains  the  details  that  appear 
later  as  a  total  in  the  general  cash  book. 

Postings  from  Cash  Book.  A  third  method  of  posting  petty  cash 
expenditures  to  the  accounts  is  accompHshed  by  expressing  the  necessary 
debits  to  the  various  accounts  in  the  general  cash  book  at  the  time  of 
making  the  entry  for  the  reimbursing  check.  Under  such  conditions,  the 
entry  as  made  on  the  cash  payments  page  of  the  cash  book  would  express 
these  debits  and  credits.    See  Figure  3. 

CASH  DISBURSEMENTS 


DATE 

L.r. 

ACCOUNT  TO  BE  DEBITED 

DETAIL 

TOTAL 

Postage 

$  5 

00 

Stationery 

15 

30 

Freight  and  Express 

40 

65 

Telephone  and  Telegraph 

13 

90 

Selling  Expense 

13 

35 

Cash  (General) 

\ 

S88 

20 

Petty  Cash  Items  Posted  from  Cash  Book 

Figure  3.    This  method  does  away  with  the  general  journal  entry,  but  it  brings  into  the 

cash  book  a  large  number  of  detail  transactions.     In  other  words  they  are  duplicates  of 

the  entries  in  the  Petty  Cash  book.    This  method  is  different  from  that  shown  in  Figure 

2,  where  only  the  total  is  brought  into  the  cash  book. 


Assignment  13,  Page  4 


k 


Petty  Cash  Balance  Sheet.  In  preparing  a  balance  sheet,  when  petty 
cash  is  kept  under  the  imprest  system,  it  is  customary  to  disregard  the 
condition  of  the  petty  cash  fund  at  the  date  of  the  balance  sheet  and  show 
as  an  asset  the  amount  charged  in  the  ledger  as  imprest,  or  petty  cash 
fund.  Such  procedure,  however,  is  not  theoretically  correct  unless  the 
petty  fund  is  reimbursed  immediately  before  the  Balance  Sheet  is  made. 
At  the  time  of  an  annual  or  other  special  balance  sheet,  therefore,  the 
petty  cash  fund  should  be  renewed,  for  two  reasons: 

1.  To  show  the  true  amount  of  assets  in  the  form  of  cash. 

2.  To  show  the  correct  amount  and  distribution  of  expenses. 

Other  Uses  of  Imprest  System.  The  principle  of  the  imprest  system 
can  be  applied  on  a  larger  scale  in  providing  working  funds  for  branch 
houses,  agents,  or  financial  officers  delegated  to  the  performance  of  spe- 
cific duties.  Thus  the  fund  of  a  branch  agent  might  be  created  in  the 
same  way  and  reimbursed  according  to  the  same  plan,  even  tho  the  amount 
might  be  as  high  as  $50,000  or  $100,000,  a  large  part  of  it  being  paid  out 
by  check  signed  only  by  the  agent  instead  of  being  paid  out  of  a  petty 
cash  drawer. 

Other  Petty  Cash  Systems.  If  the  imprest  system  is  not  used,  the  only 
other  important  method  of  handling  petty  cash  is  that  in  which  reim- 
bursements are  made  from  time  to  time  in  round  amounts  of  sufficient  size 
to  keep  the  fund  at  a  reasonable  amount.  Under  this  plan  the  creation  of 
the  fund  for  the  first  time  is  accompUshed,  as  in  the  imprest  system,  by 
issuing  a  check  and  making  similar  entries  and  postings.  The  word 
"imprest,"  however,  should  not  appear  in  the  account  title.  In  its  stead 
"Petty  Cash"  is  used. 

The  main  point  of  diflierence  between  this  and  the  imprest  method  lies 
in  the  conditions  accompanying  reimbursement.  Under  this  plan,  as  the 
petty  cash  becomes  nearly  exhausted,  a  check  is  issued  in  its  favor  for 
some  reasonable  amount,  in  multiples  of  $25  or  $50,  regardless  of  what 
the  expenditures  may  have  been.  The  new  check  does  not  necessarily 
bring  the  balance  of  petty  cash  back  to  its  original  amount. 

Disadvantages  of  This  Method.  With  this  plan  in  operation,  the  keeper 
of  the  petty  cash  book  must  record  all  cash  received  by  him,  as  well  as  all 
cash  disbursed,  and  balance  the  book  carefully  in  order  to  determine 
whether  or  not  the  amount  of  cash  in  the  drawer  is  correct.  liikewise,  it 
is  more  tedious  for  the  auditor  to  verify  the  petty  cash  when  it  is  kept 
under  this  method.  Also,  the  entry  in  the  general  accounts  must  be  such 
at  the  time  of  reimbursement  as  to  show  in  the  Petty  Cash  Account  the 
total  expenditures  and  the  amount  put  into  the  fund  from  time  to  time. 

Checks  Exchanged  for  Currency.  A  cashier  or  bookkeeper  is  occa- 
sionally called  on  to  record  transactions  in  which  the  business  receives 
currency  in  exchange  for  its  check  or  in  which  it  receives  the  check  from 
some  one  else  in  exchange  for  currency. 

1.  Cash  Received  for  Check.  Assume  that  your  business  has  an  imprest 
system,  and  that  you  issue  a  check  and  receive  cash  for  it.  How  will  you 
make  the  entry  ?    It  is  obvious  that  you  cannot  put  the  cash  in  the  imprest 

Assignment  13,  Page  5 


fund,  since  this  fund  must  remain  at  the  same  amount.    It  is  suggested 
that  the  entry  be  made  in  the  general  cash  book  as  follows : 

In  the  general  cash  payments  book,  express  a  credit  to  General  Cash 
(or  Bank)  and  debit  nothing,  but  write  in  the  space  reserved  for  explana- 
tion "See  contra,  exchange  check,"  which  means  that  on  the  other  side  of 
the  cash  book  the  same  amount  appears  as  a  debit  for  cash  received.  In 
case  of  the  latter  entry,  of  course.  Cash  is  debited  but  nothing  is  credited. 
The  explanation  is  made  here  also  referring  to  the  contra  entry  to  be 
found  among  the  cash  payments.  These  entries  of  course  balance  each 
other.  The  effect  would  be  the  same  if  no  entry  is  made  at  all.  It  is  better, 
however,  to  have  the  record  of  the  transaction. 

Now  assume  that  the  imprest  system  is  not  used  but  that  you  have 
merely  a  Petty  Cash  fund,  which  can  be  reimbursed  at  any  time  by  any 
amount,  then,  it  may  be  placed  in  the  petty  cash  drawer  and  a  debit  made 
to  Petty  Cash  account  when  making  the  entry  for  the  check  in  the  general 
cash  book,  disbursement  side. 

2.  Cash  Is  Paid  Out  for  Check.  When  the  business  receives  a  check 
from  someone  else  in  exchange  for  cash  (when  it  cashes  someone's  check) 
no  entry  is  required.  It  may  be  cashed  out  of  petty  cash  or  general  cash 
not  yet  deposited.  If  cashed  out  of  petty  cash,  the  check  may  be  put  into 
general  cash  before  banking  hours  and  its  equivalent  in  currency  placed  in 
the  petty  cash  drawer.  If  cashed  out  of  general  cash,  it  is  merely  depos- 
ited in  place  of  the  currency  which  is  displaced. 

Entries  for  Postage  Stamps  Received.  When  postage  stamps  are 
received  from  customers  in  payment  of  small  items,  entry  for  the  transac- 
tion may  be  made  in  one  of  two  ways : 

1.  In  the  journal,  expressing  a  debit  to  Postage  and  a  credit  to  the  cus- 
tomer (or  sales). 

2.  In  the  general  cash  book,  Receipts  side  expressing  a  debit  to  Cash  and 
a  credit  to  the  customer  (or  sales). 

When  the  latter  entry  is  made,  the  postage  stamps  can  be  placed  in 
the  petty  cash  drawer,  and  an  equal  amount  of  cash  taken  out  and  placed 
in  the  general  cash  drawer.  Then  an  entry  is  made  in  the  petty  cash  book 
expressing  a  credit  to  Petty  Cash  and  a  debit  to  Postage. 

Check  Stubs,  Pads,  and  Registers.  Check  stubs  are  used  for  recording 
the  essential  facts  about  each  check  issued  and  detached,  and  also  for 
recording  deposits  made  in  the  bank  on  which  the  checks  are  drawn. 

Check  pads  are  checks  in  simple  or  voucher-check  form  put  up  in  pad 
form  without  any  stubs  attached.  A  check  register  is  a  memorandum  book 
in  which  the  amount,  number,  date,  and  payee  of  each  check  is  recorded. 

When  checks  are  used  in  the  stub  form,  there  is  little  or  no  use  for 
check  pads  or  check  registers.  Check  stubs  show  all  of  the  essential  facts 
regarding  the  check  that  are  necessary  in  transferring  the  item  to  the  cash 
disbursements  book.  They  also  show  the  balance  in  the  bank  at  any  time, 
as  all  deposits  are  added  and  all  checks  issued  are  deducted. 

Assignment  13,  Page  6 


I 


Check  Pads  Inadequate.  As  a  record  or  memorandum  for  future  use, 
the  check  pad  is  inadequate,  because  when  a  check  is  written,  it  is 
removed  from  the  pad,  leaving  no  specific  evidence  of  its  use.  For  this 
reason  the  check  register  is  often  used  together  with  the  checks  that  are 
put  up  in  pad  form.  The  check  register  in  such  cases  shows  the  same 
information  that  might  otherwise  be  recorded  on  the  check  stubs.  The 
date,  amount,  number,  and  name  of  the  payee  are  recorded  as  each  check 
is  issued.  As  in  the  case  of  the  check  stubs,  great  care  is  required  to 
avoid  the  possibiHty  of  a  check  leaving  the  office  without  having  a  record 
made  of  its  issue.  The  check  register  may  also  be  designed  to  show  the 
deposits  as  made  and  the  daily  balance  of  cash  in  the  bank. 

Check  Register  Sometimes  Unnecessary.  It  is  not  always  necessary 
to  have  a  check  register  when  checks  are  used  in  pad  form,  since  the 
checks  may  be  entered  directly  in  the  cash  disbursements  book.  In  either 
case  every  precaution  should  be  taken  to  make  entries  for  every  check 
issued.  The  checks  should  be  numbered  by  the  printer,  and  every  number 
accounted  for  in  the  check  register  or  cash  book. 

Check  Register  As  a  Posting  Medium.  The  check  register  may,  how- 
ever, be  used  as  a  posting  medium.  When  it  is  so  used,  the  various 
accounts  to  be  debited  are  shown  clearly  in  the  proper  space.  The  total 
of  checks  issued  is  then  transferred  daily  to  the  general  cash  book,  if  the 
latter  is  used.  If  the  check  register  is  not  used  as  a  posting  medium,  it  is 
necessary  to  transfer  items  to  the  cash  book  in  a  way  similar  to  the  trans- 
fer of  items  from  check  stubs.  In  some  concerns  the  Check  Register  takes 
the  place  of  a  Cash  Book. 

A  common  form  of  check  register  contains  columns  designated  as 
follows : 


Date 

Check 
No. 

Payee 

Explanation 

Amount 

of 
Check 

Deposit 

Balance 

Date 

Amount 

The  Check  Register 

Figure  4.     Here  v/e  have  a  book  that  can  be  used  as  an  auxiliary  record  to  the  cash 

book.     Every  check  issued  and  every  deposit  made  is  recorded  and  then  these  items  are 

added  together  at  the  end  of  the  month.    The  totals  are  posted  to  the  cash  book. 

The  explanation  column  is  omitted  if  the  book  is  not  used  as  a  posting 
medium.  Deposit  and  balance  columns  may  be  omitted,  also.  A  separate 
check  register  should  be  used  for  each  bank. 

Check  Register  in  a  Large  Business.  The  check  register  is  not  a  prac- 
tical book  in  the  average  business.  Its  principal  value  lies  in  its  use  by 
large  concerns  to  perjuit  a  greater  division  of  labor.  An  office  boy  can 
write  checks  and  enter  them  in  the  check  register  while  he  might  not  be 
entrusted  with  the  use  of  the  cash  book. 

Bank  Pass  Book.  Altho  the  bank  pass  book  is  not  a  record  book  in 
which  the  bookkeeper  or  cashier  of  a  business  makes  entries,  it  neverthe- 
less bears  an  important  relationship  to  his  work.    The  bank  teller  records 


Assignment  13,  Page  7 


deposits  in  the  pass  book  from  time  to  time  as  they  are  made.  The  pass 
book  should  be  balanced  at  the  close  of  each  month  by  the  bank  and 
returned  to  the  depositor  with  the  checks  that  have  been  "cashed"  by  the 
bank  during  the  period.  The  balance  thus  recorded  should  be  reconciled 
with  the  balance  in  the  bank  as  shown  by  the  books  of  the  business  in 
question. 

In  many  banks  it  has  become  a  common  practice  to  send  monthly  state- 
ments to  each  of  the  larger  business  houses,  and  return  at  the  same  time 
the  canceled  (cashed)  checks.  These  statements  are  often  copies  of  the 
bank's  loose-leaf  ledger  account  with  the  depositor,  showing  each  charge 
and  credit  from  day  to  day.  Others  show  only  the  total  of  all  charges 
for  each  day.  In  either  case,  the  balance  at  the  beginning,  the  checks 
issued,  the  amounts  deposited,  and  the  balance  at  the  close  of  the  period 
are  plainly  presented. 

Bank  Certificate  for  Auditors.  A  bank  certificate  is  often  sent  to 
auditors  and  accountants  upon  request  of  officers  of  the  concern  whose 
account  with  the  bank  is  to  be  verified.  The  bank  certificate,  used  prin- 
cipally in  auditing,  supplements  but  does  not  take  the  place  of  the  bank 
statement  or  pass  book  balance.  It  is  an  independent  letter  signed  by  an 
officer  of  the  bank  stating  the  amount  of  the  balance  in  the  checking 
account  of  the  business  under  review  at  a  given  date.  The  main  point 
for  the  auditor  to  consider  is  that  the  balance  of  the  bank  statement  and 
certificate  should  correspond  for  a  specified  date. 

Reconciling  the  Bank  Balance.  When  the  bookkeeper  or  accountant 
has  received  and  recorded  for  reference  the  bank  balance,  as  shown  by  the 
bank  pass  book,  the  bank  statement,  or  certificate,  he  finds  in  most  cases 
that  the  balance  thus  presented  does  not  agree  with  the  balance  which 
the  books  of  his  business  show  as  being  on  deposit  in  the  bank. 

In  order  to  find  what  causes  this  difference,  it  is  necessary  to  perform 
a  certain  amount  of  checking.  This  checking,  with  its  accompanying 
tabulation,  is  ordinarily  called  "reconciling  the  bank  balance,"  or  "recon- 
ciling the  bank." 

Strictly  speaking,  a  bank  reconciliation  does  not  attempt  to  explain 
the  differences  due  to  errors  on  the  part  of  the  bookkeeper  of  the  business 
in  question.  The  bank  reconciliation  statement  as  prepared  by  the  book- 
keeper assumes  that  both  the  balance  as  shown  by  the  books  of  the  busi- 
ness and  the  balance  as  shown  by  the  books  of  the  bank  are  correct  within 
themselves.  The  reconciliation  statement  serves  its  purpose  by  showing 
in  detail  what  the  legitimate  difference  is,  and  how  it  happened  that  both 
the  bank  and  the  business  kept  its  records  correctly  but  still  showed  differ- 
ent results  in  so  comparatively  simple  an  account. 

On  the  other  hand,  the  term  "bank  reconciliation  statement"  may  often 
be  used  to  include  also  the  differences  due  to  clerical  errors  as  well  as 
other  differences.  This  is  due  to  the  fact  that  it  is  a  place  for  temporarily 
rcording  all  differences  until  errors  can  be  corrected. 

Cause  of  Legitimate  Differences.  The  legitimate  differences  men- 
tioned are  usually  caused  by  outstanding  checks,  that  is,  checks  not  yet 

Assignment  13,  Page  8 


cashed  by  those  receiving  them,  deposits  in  transit — namely,  currency  or 
checks  received  by  the  bank  after  it  has  made  out  the  statement,  or 
interest  and  collection  charges  entered  by  the  bank  but  not  by  the  busi- 
ness. Such  interest  and  collection  charges  are  not  yet  entered  "on  the 
books  of  the  business  because  it  does  not  receive  notice  that  such  charges 
have  been  made  until  the  bank  statement  is  received,  accompanied  by  the 
canceled  checks  and  sundry  charge  and  credit  tickets.  Other  elements, 
that  might  contribute  to  the  difference  are  collection  of  notes  or  drafts, 
protested  notes  or  drafts,  checks  received  from  customers,  which  are 
deposited  and  then  returned  "N  S  F"  (not  sufficient  funds),  interest  cou- 
pons collected,  or  other  financial  transactions  handled  by  the  bank  in  the 
interests  of  the  business,  formal  notification  of  which  is  not  received  until 
the  bank  statement  brings  this  information  with  the  accompanying  tickets 
and  checks. 

RECONCILING  BANK  BALANCE  WITH  BALANCE 

On  December  31,  1921,  the  F.  W.  Wilson  Manufacturing  Company 
receives  the  monthly  statement  from  the  First  National  Bank.  The  state- 
ment shows  a  balance  of  cash  of  $28,495.70. 

The  balance  as  per  check  stubs  amounts  to  $23,079.15.  How  is  the 
diflference  between  the  two  balances  to  be  reconciled  ?  How  did  the  account- 
ant proceed? 

1.  First  of  all  he  sorted  all  checks,  returned  by  the,  bank,  in  numerical 
order. 

2.  He  then  compared  these  checks  with  the  check  stubs  and  noted  any 
differences.  He  also  compared  the  amount  of  each  check  issued,  with  the 
list  of  checks  on  the  Statement  to  discover  any  outstanding  checks. 

3.  He  compared  the  beginning  balance  on  the  bank  statement  of  the 
month  with  the  balance  shown  as  of  the  last  day  of  the  preceding  month 
on  the  statement  for  that  month.  This  he  did  to  catch  any  errors  by  the 
bank  in  transcribing  this  balance  from  their  ledger  to  the  statement. 

4.  He  compared  all  deposits  as  per  bank  statement  with  all  deposits 
shown  on  the  check  stubs  and  noted  any  differences.  Here  he  may  find 
credits  by  the  bank,  for  notes  collected,  interest  collected,  interest  allowed 
on  average  balances,  or  similar  items. 

5.  He  listed  all  debit  tickets  by  the  bank,  such  as  collection  charges 
and  checks  returned  "N  S  F." 

Form  of  Reconciliation  Statement.  After  the  accountant  listed  these 
facts  and  analyzed  them,  if  not  in  detail  as  we  have  suggested,  at  least 
mentally,  he  proceeded  to  make  the  reconciliation  statement.  In  doing 
this  he  could  follow  either  of  two  methods: 

1.  Begin  with  the  bank  balance  and  work  back  to  the  balance  as  per 
check  stubs. 

2.  Begin  with  the  balance  as  per  check  stubs  and  work  toward  the 
bank  statement  balance. 

Assignment  13,  Page  9 


Wlien  the  accountant  for  the  F.  W.  Wilson  Manufacturing  Company 
made  the  investigation  outlined  here,  he  found  the  facts  as  shown  in 
Figure  5. 


CHECKS  OUTSTANDING: 

No.  1017  James  Black 

1031  Griswold  &  Co 

1032  Jas.  Wise  &  Son  .... 

1033  Real  Estate  Mortgage  Co. 


$    8.20 

79.60 

748.01 

5,000.00 

$5,835.81 


Deposit  of  Dec.  31  per  check  stubs, 
not  credited  by  the  bank  before 
the  close  of  business  on  that  day  $  398.76 

Note  of  L.  F.  Lewis  Co.,  with  in- 
terest collected  by  the  bank  for 
our  account  on  Dec.  31: 

Face  of  note S500.00 

Interest,  4  mos.  @  6%   10.00 


$  510.00 


The  bank  has  reduced  our 
balance  and  made  the  following 
debits  as  shown  by  the 
charge  tickets: 

Collection  charges  for 

December $      5.50 

Check  of  Howard  &  Hills 

included  in  deposit  of 

Dec.  29  returned 

"N  S  F"  $  525.00 


ANALYSIS  OF  THE  FACTS 


Items  which  we  have  entered  as 
credit.s  on  our  books,  but  the  bank 
has  not  yet  debited. 


We  have  debited  this  amount  on 
our  books,  but  the  bank  has  not 
yet  made  the  credit. 


The  bank  has  entered  these  items 
as  credits  on  its  books,  but  we  have 
not  yet  entered  the  debits,  since  we 
didn't  know  until  the  statement  was 
received  that  the  bank  had  collected 
the  note  and  interest. 


Since  we  owe  the  bank  for  these 
items,  the  bank  has  entered  them 
as  debits  to  our  account.  We  did 
not  know  about  the  collection 
charges  until  we  received  the  bank 
statement;  but  we  would  ordinarily 
know  about  the  NSF  check.  Banks, 
in  practice,  notify  their  customers 
immediately  if  any  deposited  check 
is  NSF.  This  is  done  in  conformity 
with  certain  legal  requirements,  as 
well  as  to  prevent  an  overdraft  by 
the  depositor. 


S    530.50 

Analysis  of  Facts  Preparatory  to  Reconciliation 

Figure  5.    Notice  how  the  accountant  listed  the  facts  that  require  consideration  before 

reconciliation  can  be  made.    These  facts,  however,  must  be  analyzed,  as  shown  in  the 

squares  opposite,  before  he  can  prepare  the  Reconciliation  Statement. 


Assignment  13,  Page  10 


As  a  matter  of  fact  he  used  method  1  and  set  up  the  following  state- 
ment. If  he  had  used  method  2,  he  would  have  merely  reversed  the 
process  of  additions  and  subtractions.  Either  way  is  good  and  used  in 
accounting  practice. 

RECONCILIATION  STATEMENT,  FIRST  NATIONAL  BANK, 

DEC.  31,  1921 

Balance  as  per  bank  statement,  Dec.  31,  1921 $28,495.70 

Add:   Collection  charges  for  Dec $     5.50 

Check  of  Howard  &  Hills  included  in  deposit  of  Dec.  29 
returned  "N  S  F" 525.00        530.50     (1) 

$29,026.20 
Deduct:  Note  of  L.  E.   Lewis  Co.  with  interest  collected  by  the 
bank  for  our  account  on  Dec.  31. 

Face  of  note $500.00 

Interest,  4  mos.   ©6% 10.00  510.00     (2) 

$28,516.20 
Add:  Deposit  of  Dec.  31  per  check  stubs,  not  credited, by  the 

bank  before  the  close  of  business  that  day 398.76     (3) 

S28,914.96 
Deduct:   Checks  outstanding. 

No.   1017  James  Black $      8.20 

1031  Griswold  &  Co 79.60 

1032  Jas.  Wise  &  Son 748.01 

1033  Real  Estate  Mfg.   Co 5,000.00       5,835.81     (4) 

Balance  as  per  check  stubs,  Dec.  31,  1921 $23,079.15 

The  B.\nk  Reconctliation  Statement 
Figure  6.    In  this  statement  we -start  with  the  balance  as  it  appears  on  the  books  of 
the  bank,  and  work  down  to  the  balance  as  it  appears  on  our  check  stubs.     In  answer- 
ing the  self-test  questions  on  the  details  of  this  statement,  ask  yourself  at  each  step 
what  has  the  bank  done  in  order  to  arrive  at  this  balance — that  we  have  not  done. 

You  will  find  it  valuable  to  test  your  understanding  of  the  statement 
in  Figure  5  by  considering  the  following  questions.  It  is,  of  course,  not 
required  that  answers  be  sent  to  the  University. 

What  is  the  real  reason  for  adding  $530.50?  Why  not  subtract  this 
amount  ? 

Why  is  $510.00  deducted,  $398.76  added,  etc.? 

You  can  answer  these  questions  correctly  if  you  understand  clearly 
what  a  reconciliation  statement  really  is.  It  is  an  explanation  of  the 
DIFFERENCE  that  exists  between  the  bank's  balance  and  the  balance 
as  shown  on  the  books  of  the  business.  Both  the  bank  and  the  business 
have  kept  accurate  records;  but  a  difference  exists  because  the  bank  has 
entered  some  transactions  on  its  books  that  HAVE  NOT  YET  BEEN 
ENTERED  ON  THE  BOOKS  OF  THE  BUSINESS;  likewise  the  business 
has  issued  checks  and  deposited  money,  NOT  YET  ENTERED  ON  THE 
BANK'S  BOOKS. 

In  other  words,  the  F.  W.  Wilson  Manufacturing  Company  must  bring 
the  transactions  on  its  books  which  have  been  omitted. 

Assignment  13,  Page  11 


Entries  Necessary  on  Business  Books.  The  entries  to  adjust  items 
(1)  and  (2)  are  made  as  soon  as  possible  after  the  completion  of  the 
reconciliation  statement.  It  is  obvious  in  the  case  of  item  (1)  that  the 
accountant  must  make  an  entry  crediting  the  bank  for  $530.50.  In  the 
case  of  item  (2)  he  must  make  an  entry  debiting  the  bank  for  $510.00. 

The  entries  will  be  as  follows: 

To  adjust  item  (1): 

Collection  Charges   (or  Expense)    $     5.50 

Customers'   Ledger    Howard  &  Hills       525.00 

First  National  Bank     or  cash     .    .    .  S530.50 

(Give  explanation  as  in  reconciliation  statement.) 

To  adjust  item  (2): 

First  National  Bank  (or  Cash) $510.00 

Notes  Receivable     $500.00 

Interest 10.00 

(Give  explanation  as  in  reconciliation  statement.) 

Apparently,  Howard  &  Hills  issued  a  check  for  $525.00,  but  when  the 
First  National  Bank  presented  it  to  the  bank  on  which  it  was  drawn,  the 
latter  refused  to  honor  it  because  the  balance  in  the  checking-  account  of 
Howard  &  Hills  was  not  sufficient  to  meet  the  check  in  full.  Accord- 
ingly no  part  of  it  was  paid.  At  the  time  the  check  was  received,  we 
credited  Howard  &  Hills  and  debited  the  Bank  (or  Cash) ;  the  entry  must 
be  reversed,  however,  when  it  is  found  that  what  we  received  from  Howard 
&  Hills  turned  out  to  be  of  no  value. 

Entries  Made  Later  by  Bank  for  Items  3  and  4.  After  entries  are  made 
by  the  Wilson  Manufacturing  Company  for  Items  1  and  2  the  amounts 
which  they  represent  are  checked  off  in  the  reconciliation  statement. 
The  other  items  (3  and  4)  are  left  unchecked  until  it  is  known  that  the 
bank  has  recorded  the  deposit  and  cashed  the  outstanding  checks,  because 
the  bank  is  the  party  to  make  entries  for  them,  thus : 

Item  3  adjusts  itself  automatically  when  the  following  entry  is  made 
on  Jan.  2,  1922: 

Cash $398.76 

F.  W.  Wilson  Manufacturing  Co.  .  ,  $398.76 

(To  record  deposit  of  Dec.  31,  1921, 
by  F.  W.  Wilson  Manufacturing  Co. 

Entry  for  item  4  is  made  whenever  the  checks  are  cashed  and  turned 
into  the  bank.  After  they  have  all  been  cashed  the  bank's  books  will  be 
affected  thus: 

F.  W.  Wilson  Manufacturing  Co $5,835.81 

Cash $5,835.81 

(For  payment  of  checks  issued  by 
F.  W.  Wilson  Manufacturing  Co.) 

NOTE:  These  entries,  of  course,  will  not  be  journal  entries  but  will 
be  entered  in  the  appropriate  bank  record.  They  are  shown  in  journal 
entry  form  here  in  order  to  show  clearly  the  accounts  affected. 

Assignment  13,  Page  12 


As  soon  as  we  find  out  that  the  bank  has  made  such  entries,  we  check 
off  Items  3  and  4.  This  information,  however,  is  usually  not  received 
until  the  end  of  the  succeeding  month,  when  the  next  statement  is 
received  from  the  bank  accompanied  by  the  checks  cashed  during  that 
period.  Accordingly,  a  reconciliation  statement  should  be  carefully  pre- 
served until  the  one  for  the  following  month  has  been  made.  Even  then, 
it  is  best  to  file  such  statements  away  for  future  reference. 

What  Bank  Statement  Shows,  On  the  bank  statement  for  January, 
received  by  the  accountant  soon  after  January  31,  he  will  undoubtedly 
find  the  $398.76  deposit  credited  by  the  bank.  This  having  been  shown 
on  the  December  reconciliation  statement  as  Item  3  ("We  have  debited; 
bank  has  not  credited").  Item  3  can  be  checked  off  on  the  December 
reconciliation  statement  as  soon  as  it  is  checked  off  on  the  January  bank 
statement. 

This  leaves  only  Item  4  of  the  December  reconciliation  statement  un- 
checked. Since  Item  4  is  composed  of  amounts  which  "We  have  cred- 
ited; bank  has  not  debited,"  it  is  necessary  to  determine  whether  the 
bank  has  debited  them  to  our  account  during  January.  This  can  be  easily 
determined  by  finding  out  whether  checks  numbered  1017,  1031,  1032,  and 
1033  have  been  returned  by  the  bank  with  the  January  statement.  If 
all  four  checks,  canceled  by  the  bank,  are  found  among  those  returned  at 
the  end  of  January,  all  the  amounts  constituting  Item  4  of  the  December 
reconciliation  statement  can  be  checked  off,  thus  completing  the  active 
service  of  the  latter  statement. 

If  it  is  found  that  any  of  the  four  checks  outstanding  at  the  end  of 
December  is  still  outstanding  at  the  end  of  January,  such  check  or  checks 
must  be  carried  into  the  January  reconciliation  statement,  to  show  that 
the  "bank  has  not  (yet)  debited."  Assume,  for  example,  that  check  No. 
1017  had  not  been  cashed  by  the  payee,  James  Black,  and  therefore  it 
had  not  been  returned  canceled  by  the  bank,  the  reconciliation  statement 
of  January  31  would  contain  this  item  as  the  first  one  among  its  checks 
outstanding.  If  there  happened  to  be  any  other  items  of  whatever  nature 
on  the  December  reconciliation  statement  not  cleared  up  or  accounted  for 
in  January,  they  would  be  carried  forv/ard  to  the  January  reconciliation 
statement.  Thus  it  is  necessary  to  refer  only  to  the  last  preceding  one 
in  making  up  any  new  reconciliation  statement. 

Next  Step  to  Verify  Cash  Balance.  Reconciling  the  bank  balance  is 
part  of  the  process  of  verifying  the  Cffsh  balance. 

Now  that  the  accountant  has  reconciled  the  bank,  he  verifies  his  cash 
book  balance.  He  finds  his  cash  book  has  a  debit  balance  of  $25,316.29. 
He  knows  from  his  reconciliation  statement  that  of  this  amount,  $23,079.15 
is  in  the  bank.    Where  is  the  rest? 

He  receives  from  the  clerk  in  charge  of  the  cash  drawer  an  actual 
count  of  cash  in  drawer  on  December  31,  1921.  This  amounts  to  $2,237.14. 
The  verification  of  the  cash  book  balance  will  therefore  appear  as  follows : 

Balance  as  per  cash  book,  Dec.  31,  1921.  .  .  .  $25,316.29 

Composed  of: 

Balance  on  deposit  in  First  National  Bank  as 
per  check  stubs,  reconciled  with  bank  state- 
ment as  of  Dec.  31,  1921 $23,079.15 

Counted  in  cash  drawer  2,237.14   25,316.29 


Assignment  13,  Page  13 


Verifying  the  additions  and  subtractions  on  the  check  stubs  is  part  of 
the  work  of  verifying  the  bash  book  balance  rather  than  reconciUng  the 
bank.  In  verifying  the  cash  book  balance,  any  errors  of  this  nature  on 
the  check  stubs  should  be  corrected.  Then,  in  reconciling  the  bank,  the 
corrected  figures  of  the  check  stubs  would  be  used.  In  this  way  there 
would  be  no  necessity  for  including  clerical  errors  on  the  stubs  as  part 
of  the  reconciliation  statement.  This  applies  more  to  the  cashier  and 
bookkeeper  than  to  the  accountant  and  auditor.  The  latter  would  include 
all  errors  or  differences  in  his  reconciliation  statement,  leaving  the  cor- 
rections to  be  made  by  the  person  ordinarily  responsible  for  the  keeping 
of  the  records. 

Cash  Over  and  Short  Book.  Theoretically,  all  cashiers  should  balance 
their  cash  at  least  once  every  day.  Practically,  they  balance  it  as  nearly 
as  they  can;  that  is,  they  account  for  all  the  cash  unless  there  is  some 
mistake  either  in  the  cash  record  or  in  the  cash  itself.  Any  error  found 
in  the  record  is  usually  corrected  at  once.  Any  error  in  making  change 
or  in  receiving  or  paying  cash  may  be  corrected  if  one  knows  in  wliat 
transaction  the  error  was  made.  There  are  few,  if  any,  infallible  cashiers. 
Accordingly,  the  cash  count  does  not  always  correspond  with  the  amount 
that  should  be  on  hand  as  per  the  cash  book.  As  a  result,  we  have  a 
special  book,  the  Cash  Over  and  Short  Book,  in  which  such  differences 
are  recorded. 

Accordingly  a  memorandum  is  made  in  the  cash  over  and  short  book 
for  any  difference  in  cash.  Such  a  book  serves  as  a  memorandum  to  the 
cashier  and  is  valuable  for  subsequent  scrutiny  by  the  auditor.  It  is  not 
a  posting  medium,  nor  does  it  follow  any  standard  form.  The  essential 
points  to  be  recorded  in  it  in  case  of  a  difference  are  the  date  and  hour 
of  the  count,  the  amount  over  or  short  at  this  count,  the  aggregate  amount 
over  or  short  on  all  counts  (since  writing  off  the  difference)  to  date  of 
last  balancing,  and  the  cumulative  or  aggregate  amount  over  or  short  to 
date.  The  form  on  which  the  count  of  cash  is  recorded  is  usually  filed 
away.     Such  form  should  be  available  for  reference  at  any  time. 

The  cash  over  and  short  memorandum  book  takes  the  place  of  the 
Cash  Over  and  Short  Account.  When  the  account  is  used,  an  entry  is 
made  affecting  the  general  ledger  accounts — Cash  Account  and  Cash  Over 
and  Short  Account — after  each  day  in  which  an  overage  or  shortage 
appears  in  the  cash  count.  If  the  cash  on  hand  is  less  than  the  amount 
shown  by  the  cash  book,  there  is  said  to  be  a  shortage,  or  the  cash  checks 
short.    An  entry  is  made  in  the  cash  book,  then,  expressing  this  fact : 

Cash  Over  and  Short S5.00 

Cash S5.00 

When  cash  is  over  the  entry  is: 

Cash $6.00 

Cash  Over  and  Short S6.00 

These  entries  assume  that  the  cash  was  short  $5  at  one  time  and  was 
over  ^6  at  another. 

Cash  Over  and  Short  Account  Is  Nominal.  A  debit  balance  of  the  Cash 
Over  and  Short  Account  at  the  time  of  closing  the  books  represents  a  loss, 

Assignment  13,  Page  14 


and  a  credit  balance  represents  a  gain.  It  is  therefore  a  nominal  account 
and  is  closed  at  least  once  a  year  into  Miscellaneous  Office  Expense,  or 
directly  into  Profit  and  Loss  Account. 

If  a  large  shortage  in  cash  is  caused  by  the  defalcation  of  the  cashier, 
such  a  loss  is  considered  a  capital  loss.  As  such  it  would  be  charged  to 
an  account  with  the  Surety  Company,  assuming  tha^  the  cashier  is 
bonded,  as  is  usually  required. 

THE  MAIN  POINTS  OF  ASSIGNMENT  13 

Briefly  stated,  this  assignment  emphasizes  the  need  for  additional 
records  and  papers,  in  which  details  are  entered,  in  order  that  totals  can 
be  brought  into  the  main  records,  such  as  the  Cash  book  and  the  Cash 
Account. 

The  importance  of  reconciling  the  bank's  statement  is  also  emphasized. 
The  illustrative  problem  shows  you  exactly  how  to  proceed  in  reconciling 
a  bank  statement. 

With  these  two  main  principles  thoroly  mastered,  take  up  the  problem 
work  of  this  Assignment.  The  problems  are  situations  such  as  you  as  an 
accountant  will  find  in  actual  business.  Send  in  the  solutions  for  all  the 
problems. 


Assignment  13,  Page  15 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  13 

1.  Assume  that  you  are  in  charge  of  the  general  cash  and  that  an 
imprest  system  is  started  in  your  office  on  January  2,  1922.  The  amount 
placed  in  the  imprest  fund  is  $200.00. 

Show  by  journal  entry  what  debit  and  credit  is  made  at  the  time  of 
starting  this  fund. 

2.  During  the  month  of  January  the  following  amounts  are  paid  out 
by  the  petty  cashier  and  recorded  in  the  Petty  Cash  Book: 

Postage  „...- $22.00 

Telegraph _...._ 5.25 

Carfare _...._ _.... 1.70 

Washing  Windows 12.40 

Printing  of  Letterheads „ „....  25.00 

Pencils  and  Pens 3.00 

New  Typewriter „ _ 50.00 

Telephone  Rental _ — 6.25 

On  January  31,  the  petty  cashier  calls  upon  you  to  reimburse  the 
imprest  fund. 

(a)  What  would  you  require  of  the  petty  cashier  before  you  would 
issue  a  check? 

(b)  When  you  issue  the  check,  what  entries  would  you  make  in  the 
general  Cash  Book? 

(c)  To  what  accounts  will  each  of  the  above  transactions  be  posted? 
(The  postings  in  this  case  are  made  from  the  cash  book.) 

3.  The  Andover  Furniture  Company  had  a  petty  cash  fund,  which  was 
reimbursed  from  time  to  time  with  any  amount,  regardless  of  disburse- 
ments. On  December  31,  1921,  a  representative  of  the  accounting  firm, 
auditing  the  books,  advised  the  company  to  install  the  imprest  system. 
The  company  followed  his  advice. 

What  were  some  of  the  reasons  probably  advanced  by  this  represen- 
tative in  advising  the  change? 

4.  On  January  31,  1922,  when  the  accountant  of  the  Andover  Furniture 
Company  made  up  the  balance  sheet,  he  included  under  cash  the  original 
amount  of  the  Imprest  Fund,  namely  $300.00,  in  the  balance  sheet. 

What  objections  would  you  offer  to  such  procedure,  and  what  method 
would  you  suggest  as  being  better? 

5.  On  January  31,  1922,  the  accountant  for  the  Philips  &  Clark  Mer- 
cantile Company  verified  his  cash  book  balance  and  reconciled  his  checking 
account.  The  company  does  not  have  a  petty  cash  fund,  but  makes  both 
check  and  currency  payments  from  the  general  cash  fund;  hence  it  does 
not  deposit  all  cash  received. 

The  cash  book  columns  on  January  31,  at  the  close  of  business,  show 
total  debits  of  $2,160.38,  which  includes  the  balance  of  $300.00  at  the 

Assignment  13,  Page  16 


beginning  of  the  month,  and  total  credits  to  cash  of  $1,328.48.  His 
check  stubs  show  a  balance  of  $820.31,  and  there  is  $11.59  counted  in 
the  cash  drawer. 

The  bank  statement  of  January  31  shows  a  balance  of  $851.69.  In 
comparing  the  canceled  checks  returned  by  the  bank  with  the  check  stubs 
it  is  found  that  check  No.  198  for  $25  and  check  No.  201  for  $6.38, 
issued  to  T.  Somers  and  John  Walters,  respectively,  have  not  been  cashed 
by  the  bank. 

(a)  Make  a  bank  reconciliation  statement  as  of  January  31,  1922. 

(b)  Make  a  statement  verifying  the  cash  book  balance. 

6.  The  bank  statement  of  the  Pure  Food  Grocery  Co.  for  the  month 
of  December,  1921,  shows  the  following  items  that  require  reconciliation 
and  adjustment: 

1.  Collection  charges  for  December $    6.10 

2.  60-day  note  collected  for  Pure  Food  Co.  from 

C.  B.  Haynes _ _ - -...  100.00 

3.  Interest  on  this  note  collected _ 1.00 

4.  Check  of  T.  B.  Hampton  included  in  deposit 

of  Dec.  31  returned  "N  S  F" _...._ _ 26.75 

Show  the  journal  entries  which  will  be  necessary  to  bring  out  these 
facts  on  the  books  of  the  Pure  Food  Grocery  Co. 

7.  In  verifying  the  Cash  balance  for  the  Pure  Food  Grocery  Co.  on 
December  31,  1921,  the  accountant  discovers  that  the  cash  on  hand  is 
$9.19  less  than  the  amount  shown  by  the  Cash  book.  The  cash  over  and 
short  account  has  a  credit  balance  of  $8.00. 

(a)  Show  the  entry  to  be  made  in  the  Cash  book  for  the  shortage  of 
$9.19. 

(b)  What  will  be  the  balance  of  the  Cash  Over  and  Short  Account, 
after  this  entry  has  been  posted?  Will  the  balance  be  on  the 
credit  or  debit  side? 


Assi^ment  13,  Page  17 


Higher  Accountancy 

gi  ID 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assig,nment  14 

SUNDRY  AUXILIARY  BOOKS  AND 
BUSINESS  RECORDS 


ALL  students  of  accounting  should  make  it  a  point 
to  get  practical  experience  with  firms  of  unquestion- 
able reputation  for  a  period  of  at  least  four  years,  before 
branching  out  on  their  own  account,  because:  All  the 
theoretical  work  is  of  little  value  unless  it  is  backed  up 
by  hard  knocks  from  practical  experience. 

H.  CUTHBERT . 

President,  Arizona  State  Board  of  Accountancy 


LaSalle  Extension  University 

Chicago 


NHA-U 
11-222 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectable  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Overhead 

Distribution 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analyses  of  Financial  Statements — General  Review 

Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.i.e  Extension  Universitti' 


SUNDRY  AUXILIARY  BOOKS  AND  BUSINESS  RECORDS 

Detailed  Records  Essential  to  Good  Accounting  System.  A  good  ac- 
counting system  is  made  up  of  more  than  a  ledger,  a  journal,  cash  book, 
sales  book,  and  purchase  book.  It  includes  also  numerous  auxiliary  books 
and  records,  as  well  as  miscellaneous  business  documents.  For  example, 
in  the  preceding  assignment  we  found  that  certain  auxiliary  records  help 
to  make  the  cash  book  and  the  cash  account  more  complete.  The  principal 
books  of  original  entry  and  the  ledger  form  only  the  floor  of  the  pit  into 
which  a  great  variety  of  business  transactions  are  cast  for  analysis,  classi- 
fication, and  condensation. 

Business  transactions  are  usually  reduced  to  writing  as  soon  as  pos- 
sible after  they  occur.  Business  forms  especially  prepared  for  this  pur- 
pose are  used.  Many  of  these  preliminary  or  original  records  are  then 
classified  in  an  auxiliary  book,  from  which  aggregate  amounts  are  derived 
for  use  in  expressing  debits  and  credits  in  some  book  used  as  a  posting 
medium. 

Purpose  of  Auxiliary  Books.  These  books  therefore  serve  as  inter- 
mediate records  between  the  business  papers  and  the  books  of  original 
entry. 

Some  auxiliary  books  and  forms,  however,  have  no  direct  connection 
with  posting  mediums,  but  are  merely  statistical  in  nature.  Such  records 
serve  as  a  check  or  occasional  test  of  the  accuracy  of  another  record. 

Some  of  the  more  commonly  known  auxiliary  books  in  business  are 
the  insurance  register,  car-record  book,  pay-roll  book,  inventory  book,  and 
trial-balance  book.  Other  auxiliary  books  may  of  course  be  found  in 
various  lines  of  business,  depending  on  the  nature  and  volume  of  the 
transactions.  The  manufacturing,  insurance,  banking,  public  utilities, 
and  other  specialized  businesses,  each  has  its  records  for  the  collection 
and  preliminary  tabulation  of  facts  peculiar  to  the  business. 

Insurance  Register.  A  columnar  book  known  as  the  insurance  register 
is  used  in  recording  the  detail  facts  about  fire,  tornado,  plate  glass,  or 
other  forms  of  property-insurance  policies.  The  facts  usually  recorded 
are:  date  and  number  of  policy;  name  of  issuing  company;  nature  of 
property  insured  (frame  store  building,  brick  garage,  etc.) ;  amount  of 
the  policy ;  date  of  expiration  of  the  policy,  and  the  amount  of  premiums. 

The  amount  of  the  premium  may  also  be  distributed  in  special  monthly 
columns  to  show  the  amount  expiring  each  month.  This  distribution  is 
valuable  in  making  monthly  adjustments  for  expired  and  unexpired  in- 
surance. Expired  insurance  is  an  expense  for  the  month,  while  the  unex- 
pired portion  is  an  asset.  This,  however,  will  be  fully  explained  in  a  later 
assignment. 

The  insurance  register  usually  takes  up  both  pages  of  the  book  ioi  c 
single  entry.  Figure  1  shows  a  simple  insurance  register,  as  it  appears 
without  the  distribution  columns. 


Date  of 
Policy 


No. 


1922 

Jan.    '  2    2243 
March  ,15      389 


Name  of 
Company 


Standard 
Acme 


Property 
Insured 


Store 
Warehouse 


Amount  of 
Policy 


$6,000.00 
5,000.00 


Expires 


Jan. 2-  1925 
Mar. 15-1925 


Total  Premium 


$48 
20 


The  Insurance  Register 

Figure  1. — The  Register  shown  here  contains  entries  for  two  policies.    Note  the  way 
entries  are  made  and  you  will  understand  the  purpose  of  each  column. 

The  insurance  register  illustrated  in  Figure  1  is  not  a  posting  medium. 
It  is  one  of  those  auxiliary  books  which  is  used  not  only  for  reference,  but 
which  also  supplies  amounts  necessary  in  making  entries  in  books  used  as 
posting  mediums. 

When  this  simple  insurance  register  is  used,  the  amount  of  premiums 
expiring  from  month  to  month  must  be  calculated  before  making  the 
entry  in  the  journal. 

Car  Record  Book.  Business  concerns  that  have  railroad  switch  tracks 
leading  to  their  plants,  warehouses,  or  yards,  or  those  using  near-by  team 
track  facilities  quite  extensively,  have  need  for  a  car-record  book.  Such 
a  book  is  valuable  as  a  reference  book  for  several  purposes.  It  enables 
the  business  to  identify  carload  shipments  coming  in  or  going  out,  in 
order  that  invoices  may  be  properly  approved  for  payment,  or  that  bills 
may  be  duly  sent  to  the  parties  ordering  in  carload  lots. 

Another  very  useful  purpose  is  that  of  verifying  demurrage  or  switch- 
ing bills  presented  by  the  railroad  companies.  For  every  day  or  fraction 
thereof  over  forty-eight  hours  that  a  car  is  detained,  the  concern  holding 
such  a  car  is  charged  at  a  daily  rate  of  two  dollars.  This  rate  is  increased 
after  a  certain  time  to  five  dollars  a  day.  The  charge  applies  either  to 
cars  loading  or  unloading.  Before  such  bills  are  paid  they  should  be 
verified  with  the  car-record  book,  which  shows  the  essential  facts  relating 
to  the  loading  or  unloading  of  the  cars. 

The  car-record  book  need  not  be  an  elaborate  book.  It  has  little  or 
nothing  to  do  with  values.  No  entries  in  posting  mediums  depend  on  it 
for  their  figures.  There  are  a  variety  of  forms  which  are  in  use  as  car- 
record  books,  depending  on  the  volume  of  the  carload  business,  the 
number  of  incoming  and  outgoing  cars,  and  the  nature  of  the  materials 
carried.  For  example,  concerns  handling  sand,  slag,  gravel,  coal,  and 
similar  commodities  have  practically  no  other  way  of  identifying  ship- 
ments than  by  the  number  of  the  car  into  which  they  are  loaded.  If  the 
purchaser  pays  the  freight,  there  would  be  no  indication  to  the  shipper 
of  any  omission  of  a  car  from  the  car-record  book. 

As  cars  are  loaded  with  any  of  these  bulky  commodities,  a  record  is 
made  of: 

1.   The  car  number  and  initials. 


Assignment  14,  Page  2 


2.  The  gross  tare  and  net  weight  of  the  car. 

3.  The  name  of  the  party  to  whom  it  is  to  be  shipped. 

4.  The  railroad  or  railroads  over  which  it  is  routed. 

The  date  of  shipment  is  very  important  for  the  purpose  of  verifying 
demurrage  bills.  Likewise,  the  day  should  be  noted  on  which  the  car 
was  placed  on  the  spur  or  siding  available  for  use.  These  facts  are 
usually  jotted  down  in  the  yard  book  by  a  superintendent  or  his  assistant, 
and  they  are  later  transcribed  into  the  car-record  book  kept  at  the  office. 
Special  check  marks  may  be  adopted  for  indicating  when  a  bill  was  sent 
to  the  purchaser  for  carloads. 

Concerns  handling  commodities  that  are  loaded  in  cars  as  distinct 
pieces,  such  as  furniture,  farm  implements,  etc.,  are  not  likely  to  over- 
look the  billing  of  the  purchases,  for  there  is  a  specific  count  necessary 
in  loading  the  car.  The  number  of  pieces  loaded  is  usually  designated 
on  the  order,  which  is  duly  entered  and  priced  without  waiting  for  the 
car  to  be  weighed.  In  the  case  of  bulky  commodities,  the  weight  of  the 
car  is  used  for  billing  the  customer,  as  well  as  for  determining  the  amount 
of  the  freight  charges. 

Special  attention  is  given  to  the  cross  references  between  the  car 
record  and  the  invoice  of  the  commodities  when  the  latter  are  distinct 
units.  The  invoice  for  a  carload  shipment  should  always  show  the  car 
number.  The  car-record  book  of  both  the  shipper  and  purchaser  should 
show  by  some  abbreviation  whether  an  invoice  has  been  sent  or  received, 
respectively. 

The  column  containing  car  numbers  should  stand  out  foremost  in  the 
car-record  book  of  the  purchaser  or  seller.  These  numbers  are  the  most 
vital  part  of  the  record  and  should  be  recorded  accurately  and  distinctly. 
The  cars  may  be  listed  in  any  of  the  following  ways:  (1)  chronologically 
as  received  or  shipped;  (2)  by  the  class  of  commodity;  or  (3)  by  the 
number  of  the  car.  In  the  latter  case,  a  unique  system  is  in  use  similar 
to  that  of  index  tabs  to  a  ledger,  by  which  all  cars  with  the  last  two  digits 
alike  are  found  on  the  same  page.  Thus  on  the  pages  covered  by  the 
tab  "06"  would  be  found  all  cars  whose  numbers  end  in  06,  as  319706, 
126206,  etc. 

Pay-RoU  Book  or  Sheets.  One  of  the  most  prominent  subsidiary  or 
auxiliary  records  is  the  pay-roll  book,  one  form  of  which  is  illustrated 
in  Figure  2.  It  is  set  up  so  that  it  can  contain  the  names  of  employes 
and  the  amount  of  wages  or  salaries  which  they  are  entitled  to  receive 
from  time  to  time. 

Three  ways  of  keeping  records  of  pay  rolls  are  being  used  in  business: 

1.  Requiring  the  signature  of  each  employe,  opposite  the  amount  he  is 
paid,  on  the  pay  roll  itself. 

2.  Requiring  the  signature  of  each  employe  on  a  separate  receipt 
only,  and  not  on  the  pay  roll  itself. 

3.  Not  requiring  any  signature  or  receipt  for  wages  paid. 

Assignment  14,  Page  3 


In  any  case,  the  pay-roll  book  shows  the  employes'  names,  the  unit 
rate  of  pay,  and  whether  they  are  employed  by  the  hour,  day,  week,  or 
month.  The  names  are  usually  grouped  by  operating  departments  or 
according  to  the  nature  of  the  work  being  done.  The  office  pay  roll  is 
usually  kept  separate  from  the  pay  roll  of  other  employes. 

When  employes  are  hired  by  the  hour  or  day,  there  are  usually  col- 
umns added  for  the  number  of  hours  worked  each  day.  The  total  number 
of  hours  is  shown,  followed  by  the  rate  and  total  amount  of  pay  for 
the  week. 


The  Pay-Roll  Book 
Figure  2. — This  pay-roll  book  contains  columns  for  each  day  of  the  week,  with  a 
column  for  the  extended  totals.  In  this  way  an  accurate  record  can  be  kept  for  each 
employe,  so  that  at  any  time  the  amount  due  each  employe  can  be  easily  determined. 
Such  a  book  is  usually  preferred  to  separate  pay-roll  sheets,  which  otherwise  may 
either  be  lost  or  misplaced,  unless  they  are  carefully  filed. 

In  many  concerns  employes  are  numbered,  in  which  case  their  numbers 
will  appear  in  front  of  their  respective  names  on  the  pay-roll  sheet  or 
book.  In  case  separate  receipts  are  used,  the  numbers  must  also  appear 
on  them.  When  time  clocks  are  used,  with  either  the  rectangular  card 
or  dial,  the  data  is  transferred  to  the  pay-roll  sheet  in  the  same  way  as 
if  the  employes  were  reported  only  on  the  usual  daily  report  of  the  fore- 
man. 

Generally  the  pay-roll  book  is  one  of  those  auxiliary  records  used  for 
the  summarizing  of  essential  facts  preparatory  to  expressing  the  result- 


Assignment  14,  Page  4 


ing"  aggregate  in  terms  of  debits  and  credits  in  some  posting  medium. 
Thus  the  sorting  of  the  employes  by  departments  enables  the  book- 
keeper to  calculate  the  amount  of  the  wages  applicable  to  each  depart- 
ment. The  amounts  calculated  in  this  way  may  be  clearly  indicated  in 
the  pay  roll.  From  the  record,  then,  the  amounts  may  be  obtained  for  the 
purpose  of  debiting  proper  expense  accounts  and  crediting  Cash,  Wages 
Accrued,  Vouchers  Payable,  or  some  account  to  represent  the  method  of 
procedure  in  payment.  Such  debits  and  credits  are  expressed  in  the  cash 
book  directly,  or  in  the  journal  or  vouchers-payable  register,  which  will 
be  explained  later. 

If  entries  for  the  pay  roll  are  made  in  the  journal,  or  if  posted  directly 
from  the  pay-roll  book,  it  is  customary  to  debit  the  several  expense  ac- 
counts and  credit  a  pay-roll  account.  The  entry  in  the  cash  book,  made 
almost  simultaneously,  is  a  debit  to  the  Pay-Roil  Account  and  a  credit 
to  Cash. 

All  pay-roll  books  or  sheets  should  be  approved  by  some  responsible 
officer,  manager,  or  partner  before  payment. 

Inventory  Book.  Another  record  which  may  be  kept  in  book  form  or 
on  sheets  arranged  for  filing  is  the  inventory  of  supplies,  materials,  or 
salable  goods  on  hand  illustrated  in  Figure  3.  This  sort  of  inventory 
record  refers  only  to  the  one  showing  the  results  of  the  physical  in- 


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The  Inventory  Book 
Figure  3.— The  inventory  book  is  an  auxiliary  record  for  the  details  that  make  up 
the  total  inventory,  which  is  later  brought  into  the  Trading  Account,  and  which  is 
also  entered  in  the  balance  sheet  and  the   profit  and  loss   statement,   opposite  the 

item,  Current  Inventory. 

ventory  (i.e.,  actual  count,  and  not  to  the  perpetual  or  running  in- 
ventory, which  is  referred  to  later  in  the  assignment.  Such  an  auxiliary 
record  is  more  common  in  trading  concerns  than  in  manufacturing  in- 
dustries.   The  latter  are  more  likely  to  have  perpetual-inventory  ledgers. 

The  main  purpose  of  the  inventory  book  is  to  show  the  quantity,  unit 
cost  price,  and  total  cost  price  of  each  class  of  articles  on  hand,  and  from 


Assignment  14,  Page  5 


this  the  aggregate  inventory  value  of  all  goods  and  supplies  on  hand  at 
the  close  of  a  fiscal  period.  It  is  customary  in  trading  concerns  to  take  a 
physical  inventory  at  least  once  a  year. 

A  columnar  form  of  book  is  found  convenient  for  the  inventory  in 
concerns  having  a  fairly  standard  line  of  goods.  The  book  can  be  so  ar- 
ranged that  opposite  any  specific  article  may  be  shown  the  quantity,  unit 
price,  and  total  price  at  the  close  of  each  of  four  or  five  years.  This  per- 
mits of  easy  comparison  of  results.  It  is  found  more  economical  in  most 
concerns,  because  of  variations  in  the  styles  or  brands  of  goods  carried, 
to  prepare  each  year's  inventory  on  sheets  in  typewritten  form. 

Because  of  the  importance  of  the  inventory  for  balance-sheet  purposes, 
and  in  determining  resources  and  profits,  it  is  necessary  that  the  in- 
ventory book  or  sheet  should  be  very  carefully  prepared.  The  individual 
items  should  be  priced  at  cost,  unless  the  market  price  is  less  at  the  time 
of  taking  the  inventory,  in  which  case,  accountants  advocate  using  the 
market  price.  Cost  price  is  better,  however,  if  it  appears  certain  that  the 
change  in  price  is  only  a  temporary  fluctuation. 

Like  most  of  the  other  auxiliary  books  and  records,  the  inventory 
book  is  one  in  which  values  are  assembled  for  the  purpose  of  obtaining 
a  total  to  be  used  in  expressing  debits  and  credits  in  the  journal. 

The  entry  will  be: 

Debit  Current  Inventory 

Credit  Trading,  Purchases,  or  Cost  of  Sales 

Trial-Balance  Book.  As  its  name  implies,  the  trial-balance  book  is 
used  for  recording  trial  balances.  In  addition  to  the  general  ledger  trial 
balance  before  closing,  it  also  often  contains  the  lists  of  balances  of  the 
subsidiary  ledger. 

The  general  ledger  trial  balance,  containing  names  that  do  not  change 
from  month  to  month,  is  very  well  adapted  to  the  columnar  form.  The 
trial-balance  books  on  the  market  usually  have  provision  for  recording 
twelve  trial  balances  by  writing  the  names  of  the  accounts  only  once. 
This  presumes  that  a  trial  balance  is  taken  every  month. 


The  Trial-Bal.\nce  Book 
Figure  4. — ^This  book  provides  a  permanent  record  for  monthly  trial  balances.  If  you 
were  merely  to  set  up  your  trial  balances  on  sheets  of  paper,  without  keeping  a 
permanent  record,  these  papers  might  be  lost  or  mislaid.  If  the  trial  balances  are 
kept  In  a  book,  they  can  be  easily  referred  to  whenever  necessary.  Thus  you  see  the 
reason  for  calling  the  trial-balance  book  an  auxiliary  record. 

Since  there  are  likely  to  be  new  accounts  inserted  in  the  course  of  a 
year,  it  is  best  to  leave  blank  spaces  for  such  insertions.  These  spaces 
should  be  left  after  each  group  of  accounts. 


Assignment  14,  Page  6 


File  of  Sales  Tickets.  In  the  retail  business,  sales  are  usually  recorded 
first  on  sales  tickets  before  they  are  brought  into  the  main  records.  Sales 
tickets  are  of  two  types — those  for  cash  sales  and  those  for  charge  sales. 
Such  tickets  are  filled  in  by  the  clerk  making  the  sale  and  are  quite  simple 
in  case  of  the  small  retail  store.  In  a  large  department  store,  however,  a 
somewhat  more  complicated  form  is  used  because  of  the  necessity  of 
showing  the  department,  the  sales  person,  the  approval  of  a  responsible 
sales  supervisor,  and  other  miscellaneous  data.  Cash  sales  are  recorded 
on  different  colored  tickets  from  sales  on  account.  Tickets  are  made  in 
duplicate  by  the  use  of  carbon  paper.  The  original  copy  is  handed  to  the 
purchaser  or  delivered  with  the  goods,  and  the  carbon  copy  is  sent  to  the 
cashier  with  the  cash,  if  a  cash  sale.  In  case  of  a  charge  sale  the  ticket 
is  sent  to  the  bookkeeper.  At  the  close  of  each  day,  the  total  of  the  cash- 
sales  tickets  and  of  the  sales  on  account  is  obtained. 

The  total  of  the  cash  sales  is  used  as  a  basis  for  an  entry  in  the  cash 
book,  expressing  a  debit  to  Cash  and  a  credit  to  Sales. 

Sales  tickets,  of  course,  cannot  be  considered  as  posting  mediums 
when  the  totals  are  entered  in  some  other  book  preparatory  to  posting. 
But  v/hen  the  sales  tickets  are  kept  in  a  binder,  they  may  also  be  used 
as  posting  mediums,  as  explained  in  Assignment  8. 

Any  adding-machine  lists  prepared  daily  from  cash-sales  tickets,  or 
sales  tickets  on  account,  should  be  preserved  and  filed  with  the  day's 
tickets  to  which  they  apply.  It  is  the  practice  in  many  stores  to  sort  the 
tickets  by  departments  and  also  by  sales  people,  so  that  proper  credit  may 
be  given  each  department  and  each  salesman.  Each  department  may  have 
a  separate  account  in  the  ledger,  but  each  salesman  need  not  have  a 
separate  account.  Any  records  of  sales  made  for  individual  salesmen 
are  only  statistical,  and  do  not  result  in  entries  to  any  accounts  in  the 
general  ledger.  Care  should  be  used,  however,  to  see  that  the  sum  of  all 
sales  divided  among  the  salesmen  is  equal  to  the  sum  of  all  sales  for  the 
day. 

Cash-Register  Strip.  What  has  been  said  concerning  cash-sales  tickets 
might  be  applied  in  a  general  way  to  the  cash-register  strip.  The  latter 
is  also  an  auxiliary  record,  because  the  total  or  totals  calculated  on  the 
strip  are  used  in  setting  up  an  entry  expressing  a  debit  to  Cash  and  a 
credit  to  various  accounts  indicated.  The  sales  made  by  each  person  can 
be  found  by  the  letter  of  the  cash  drawer  assigned  to  each  one,  if  the 
register  has  such  a  device. 

If  cash  received  from  customers  on  account  is  placed  in  the  cash 
register,  such  fact  is  recorded  by  a  special  key  on  the  machine,  or  by 
placing  a  slip  in  the  proper  drawer.  In  either  case,  the  amount  received 
from  customers  on  account  would  be  credited  to  the  respective  customer's 
individual  account  and  to  the  Accounts  Receivable  Controlling  Account 
in  the  general  ledger,  as  described  in  Assignment  9. 

Miscellaneous  Auxiliary  Books  and  Records.  Some  of  the  more  com- 
mon books  and  records  of  an  auxiliary  nature  have  been  discussed,  but  the 
list  has  not  been  exhausted  by  any  means.  There  are  other  books  in  the 
average  trading  concern  that  might  be  presented,  such  as  the  shipping 

Assignment  14,  Page  7 


clerk's  record,  various  devices  used  by  the  purchasing  or  selling  depart- 
ment to  classify  goods,  markets,  territorial  districts,  advertisements,  etc. 
In  addition  to  these,  most  lines  of  business  have  records  peculiar  to  the 
specific  business.  Real  estate  agents  have  rent  records,  vacancy  records, 
collection  records,  and  others.  Banks  have  signature  books  or  cards,  tell- 
ers' proof  sheets,  and  other  forms  not  necessarily  used  as  posting  mediums. 
Similarly,  insurance  offices,  railroad  offices,  gas  and  electric  companies,  etc., 
have  record  books  into  which  are  placed  fundamental  auxiliary  facts  needed 
in  the  successful  management  of  their  business,  but  in  which  debits  and 
credits  are  not  expressed  for  posting  purposes. 

BUSINESS  PAPERS 

The  first  step  that  is  usually  taken  in  any  statistical  investigation  is  the 
collection  of  the  data.  In  the  collection  of  data  for  the  U.  S.  Census,  cer- 
tain specified  forms  are  used  in  order  to  secure  uniform  data.  Much  the 
same  principle  applies  in  collecting  data  for  the  account  books  of  a  busi- 
ness. The  accountant  who  designs  the  system  knows  what  kind  of  infor- 
mation is  wanted  in  the  books  and  statements.  Accordingly,  he  arranges 
to  have  such  information  collected  in  a  systematic  and  uniform  way.  By 
designing  business  forms,  he  renders  it  possible  or  perhaps  necessary  for 
the  clerks  in  a  business  to  collect  the  same  sort  of  data  concerning  trans- 
actions of  a  like  nature. 

In  order  to  expedite  and  make  uniform  the  collection  of  business  data, 
various  forms  are  provided  which  may  be  referred  to  by  the  general  term 
of  "business  papers."  This  term  may  be  applied  to  all  forms  used  in  busi- 
ness for  the  purpose  of  making  a  written  record  of  anything  in  connection 
with  the  affairs  of  the  business,  at  the  time  the  transaction  takes  place. 

Some  common  forms  affecting  the  accounting  procedure  of  a  business 
are:  sales  invoices,  debit  memorandums  or  journal  bills,  purchase  invoices, 
receiving  records,  store  records,  credit  memorandums — issued  and  received 
— checks  and  cash  receipts,  notes  and  drafts,  bills  of  lading,  and  statements 
of  account.  These  business  forms  may  be  considered  as  formal  letters 
passing  from  one  department  of  a  business  to  another,  and  to  outside 
parties,  notifying  such  departments  or  parties  of  some  specific  event  that 
needs  further  tabulating  or  recording. 

Sales  Invoices.  The  sales  invoice,  commonly  called  "bill,"  does  not  differ 
materially  from  the  sales  ticket,  except  that  the  latter  is  usually  employed 
in  connection  with  retail  businesses,  while  the  invoice  is  used  in  vs^holesale, 
jobbing,  or  manufacturing  concerns. 

The  starting  point  of  the  ordinary  charge  sale  is  the  order.  This  may 
be  a  request  to  ship  certain  designated  articles,  coming  from  the  salesman, 
in  which  case  it  will  probably  be  written  on  a  special  form  arranged  to 
save  time  in  the  writing  and  to  tabulate  the  articles  desired.  The  order 
may  come  directly  from  the  customer,  and  in  this  case  it  may  be  on  one 
of  his  own  order  blanks  or  merely  in  a  letter.  Sometimes  the  order  may 
originate  in  a  telephone  conversation.  But  in  any  event  there  must  be  at 
hand  some  memorandum  of  the  goods  wanted;  and  hence  the  order  is 

Assignment  14,  Page  8 


transcribed  onto  a  sales  invoice,  regardless  of  the  method  by  which  it  was 
received. 

Billing.  When  the  goods  have  been  shipped,  the  order  goes  to  the  bill- 
ing clerks,  who  make  out  the  bill  or  sales  invoice.  This  document  is  a 
simple  letter  head  with  vertical  rulings  to  make  columns  for  quantities, 
prices,  amounts,  etc.  Upon  it  is  written  the  name  of  the  buyer,  the  terms 
of  the  sale,  the  articles  sent,  with  their  respective  prices,  quantities,  etc. 
This  invoice  operates  to  notify  the  buyer  that  the  goods  have  been  sent, 
and  that  he  is  now  indebted  to  us  for  the  amount  named.  Invoices  are 
usually  numbered  serially  for  reference  and  filing  purposes. 

In  large  and  progressive  business  establishments  the  billing  process  is 
often  more  complicated.  The  order  goes  at  once  to  the  billing  department, 
where  a  "shipping  ticket  set"  is  made  up.  This  set  consists  of:  (1)  Ship- 
ping ticket,  on  which  shipment  is  actually  made  and  from  which  the  charge 
is  posted  to  the  customers'  ledger.  (2)  Shipping  memo,  which  is  mailed 
to  the  customer  on  the  .day  of  shipment.  This  shows  the  essential  pack- 
ing and  shipping  information  for  the  customer.  (3)  Bill  or  invoice,  mailed 
to  customer  after  it  has  been  priced,  extended,  freight  charges  added, 
etc.  (4)  Packing  slip,  which  is  packed  with  the  goods  and  shows  the  cus- 
tomer's purchase  order  number,  so  that  the  customer's  receiving  clerk 
can  match  it  with  the  proper  receiving  slip  in  his  file.  (5)  Ticket  audit- 
ing copy,  which  is  the  accountant's  control  and  follow-up  record  to  insure 
each  shipping  ticket's  being  returned  to  file. 

Debit  Memorandum  or  Journal  Bill.  This  record  covers  memo  charges 
for  returned  material  or  for  sales  of  equipment  or  merchandise  on  which 
there  is  no  profit  taken.  The  sale  of  scrap  material  or  a  second-hand  ma- 
chine would  be  handled  on  a  journal  bill  and  would  not  be  included  as  a 
part  of  the  regular  sales  volume. 

Purchase  Invoices.  The  source  of  information  regarding  our  purchases 
is  the  purchase  invoice.  This  is  the  document  which  to  the  seller  is  a 
sales  invoice.  For  such  of  these  purchases — invoices  that  represent  mer- 
chandise to  be  resold — there  is  an  entry  made  in  the  purchase  book.  These, 
however,  are  not  the  only  invoices  we  are  likely  to  receive,  tho  they  will 
probably  always  be  in  the  majority.  Should  equipment  of  any  kind  be 
bought,  an  invoice  would  come  with  the  shipment  just  as  in  the  case  of 
merchandise,  but  such  an  invoice  would  be,  in  the  case  of  the  small  busi- 
ness, the  basis  for  an  entry  in  the  journal,  if  the  bill  was  not  to  be  paid 
at  once  (debit  equipment ;  credit  the  seller) ;  if  it  was  to  be  paid  at  once, 
the  entry  to  Equipment  Account  could  come  directly  thru  the  cash  book. 
In  large  organizations  a  special  journal  will  likely  be  kept  for  such  trans- 
actions, known  as  a  "construction  voucher  journal." 

Similarly,  invoices  for  repairs,  services,  or  expenses  of  any  nature 
would  not  be  entered  in  the  regular  purchase  book.  Their  entry  is  made 
in  the  regular  journal  or  a  special  journal.  In  a  later  assignment  you 
will  become  familiar  with  the  voucher  journal  (more  often  called  the 
voucher  register) ,  in  which  invoices  that  have  been  approved  for  payment 
are  usually  entered,  particularly  in  the  larger  business  organizations. 

Assi£niment  14,  Page  9 


Auditing  Invoices  or  Vouchers.  When  an  invoice  is  received  it  should 
not  be  paid  until  duly  approved.  It  should  not  be  approved  until  someone 
in  authority  has  determined,  thru  the  signatures  of  various  responsible 
employes,  that  the  goods  or  services  charged  on  the  invoice  have  been  re- 
ceived or  rendered,  that  the  quantity  and  quality  are  of  the  kind  con- 
tracted for,  that  the  price  per  unit  is  the  price  agreed  upon,  and  that  the 
extensions  (multiplications)  and  additions  are  correct. 

This  means,  usually,  that  the  invoice  should  be  approved  by  the  receiv- 
ing clerk,  the  purchasing  agent,  and  the  clerk  who  verifies  the  mecchanical 
accuracy  of  the  invoice.  The  financial  oflScer  or  partner  should  always 
approve  the  invoices  for  payment.  It  is  he  who  decides  the  priority  of 
payment  when  there  are  a  number  of  invoices  on  hand  at  one  time.  He  is 
the  one  responsible  for  taking  advantage  of  discounts.  Purchase  invoices 
are  assigned  numbers  and  may  be  filed  in  numerical  order,  or  according  to 
the  name  of  the  seller. 


Received  on  account  of  Order  No., 
From 


Date.. 


Via 


F.  O  B.  Point 


Frt.  chgs. 


Quantity 


Unit 


Description  of  Materials 


Signed. 


Receiving  Clerk. 


Received  into  stores. 


Signed.- 


Storekeeper. 


Checked  with  Invoice. 


Signed. 


Invoice  Clerk 


RECKTviNa  Report 

Figure  5. — In  addition  to  the  information  which  this  report  shows  it  is  common  also 
that  the  Receiving  Report  show  that  the  goods  have  been  inspected  and  passed  by 

the  inspector. 


Assignment  14,  Page  10 


Receiving  Records.  Before  a  purchase  appears  on  the  books,  it  is  en- 
tered on  certain  auxiliary  records  and  papers.  For  example,  when  goods 
are  received  in  the  storeroom  and  have  been  examined  and  inspected,  a 
preliminary  record  is  made  of  the  quantities  received,  either  by  the  store- 
keeper or  the  receiving  clerk.  These  preliminary  records  are  called  receiv- 
ing records. 

These  forms  will  of  course  vary  in  details.  One  business  will  need  re- 
ceiving records  that  another  business  cannot  use.  Figure  5  illustrates  a 
typical  receiving  report.  Such  a  report  should  be  made  out  in  triplicate, 
the  original  being  retained  and  filed  in  numerical  order,  or  by  date,  by  the 
receiving  clerk.  The  second  copy  should  go  to  the  purchasing  department, 
where  it  serves  as  notice  of  the  delivery  of  material.  The  third  copy  fol- 
lows the  material  to  the  storeroom. 

Stores  Records — Perpetual  Inventory.  The  storekeeper  not  only  re- 
ceives stock  or  material,  but  also  sends  it  out  to  the  store  or  factory.  This 
continued  inflow  and  outflow  of  goods  requires  accurate  accounting. 

Accordingly  the  storekeeper,  or  whoever  is  in  charge  of  stock,  keeps 
a  record  of  all  goods  received  and  all  goods  issued  from  stores.  This  rec- 
ord is  called  a  stores'  record  and  is  part  of  the  perpetual  inventory  system. 
It  is  termed  perpetual  because  it  shows  currently  the  amount  of  goods 
on  hand. 

This  is  of  great  help  to  an  accountant,  especially  when  he  sets  up 
monthly  statements,  because  he  can  get  his  current  inventory  amount 
from  the  records,  instead  of  being  required  to  take  a  physical  count  of  all 
goods  on  hand.  Of  course  these  records  should  be  verified,  probably  once 
or  twice  a  year,  i.e.,  checked  with  a  physical  inventory,  and  any  differences 
traced. 

The  stores'  records  naturally  vary  greatly  in  detail,  depending  on  the 
nature  of  a  business.    One  of  the  simplest  forms  is  reproduced  in  Figure 


Article ,  Location ,  Unit 

Ordered 

Received 

Issued 

Balance 

Date 

Order 
No. 

Quan- 
tity 

Date 

Order 
No. 

Quan- 
tity 

Price 

Amt. 

Date 

Order 
No. 

Quan- 
tity 

Price 

Amt. 

Quantity 

PerpetualcInventory  Recced 

Figure  6 — This  record  will  show  currently — day  by  day — the  quantity  and  value  of 
goods  on  hand.    It  is  preferably  a  loose-leaf  or  card  record. 


Assignment  14,  Page  11 


6.    Later  in  the  course,  these  records  will  be  discussed  more  fully,  in  con- 
nection with  manufacturing  accounting. 

All  these  records  are  auxihary  to  the  main  records,  and  are  controlled 
by  accounts  in  the  general  ledger,  as  will  be  explained  later. 

Credit  Memorandum  Sales.  In  case  sales  are  returned,  or  allowances 
requested,  the  fact  would  first  come  to  notice  in  the  correspondence.  Later, 
this  might  be  checked  up  by  a  report  from  the  shipping  room  of  the  arrival 
of  the  returned  goods.  When  the  unsatisfactory  nature  of  the  goods  had 
been  verified,  or  the  justice  of  the  customer's  claim  otherwise  passed  upon, 
a  credit  memorandum,  explained  in  Assignment  8,  would  be  made  out. 

Credit  Memorandums — Purchases.  It  will  be  observed  that  there  will 
be  credit  memos  for  purchases,  as  well  as  for  sales.  What  will  be  a  sales- 
credit  memo  to  the  seller  becomes  the  purchase-credit  memo  to  the  buyer. 
It  is  good  practice  to  make  the  entry  (Debit,  Accounts  Payable;  Credit, 
Purchases  Returned)  only  after  receipt  of  the  credit  memo,  as  this  prevents 
the  entry  of  items  about  which  there  may  be  some  dispute. 

These  documents  are  at  once  a  means  of  communication  and  a  basis 
for  accounting  entries.  The  invoice  means  that  the  goods  named  have  been 
forwarded;  the  title  now  rests  in  the  buyer,  and  he  is  indebted  to  the 
seller  to  the  full  amount  specified.  The  credit  memo  means  that  indebted- 
ness previously  incurred  is  thereby  reduced  in  amount  and  for  the  reasons 
specified.  The  bookkeeper  of  the  concern  receiving  such  a  credit  memo- 
randum, therefore,  makes  an  entry  to  show  the  facts  as  evidenced  by  this 
document. 

A  Statement  of  Account.  A  statement  of  account  notifies  a  customer 
of  the  amount  he  owes.  Such  a  statement  is  sent  out  usually  at  the  close 
of  each  month.  It  shows  the  name  and  address  of  the  customer,  and  indi- 
cates the  date  and  amount  of  all  sales  invoices  issued  to  that  customier 
during  the  month,  as  well  as  any  balance  due  from  the  preceding  months. 
Statements  are  rendered  also  on  old  balances  of  inactive  accounts,  i.e., 
accounts  which  show  no  sales  during  the  month.  These  statements  or 
copies  of  them  are  sent  to  sales  managers,  who  use  them  to  follow  up  old 
customers  for  further  business  or  for  information  as  to  why  they  are  not 
buying  regularly.  No  other  facts  concerning  the  invoices  are  shown.  From 
the  total  of  such  invoices  recorded  on  the  statement  of  account  are  de- 
ducted any  credits  during  the  month,  as  for  returned  goods,  allowances, 
cash,  or  notes.  The  resulting  amount  is  what  the  customer  is  expected 
to  pay  soon,  usually  within  the  next  thirty  days. 

The  statements  of  account  are  made  up  from  the  ledger  accounts  of 
the  various  customers.  They  are  not  used  as  a  basis  for  any  further 
entries  on  the  books  of  the  concern  issuing  them.  The  concern  receiving 
a  statement  of  account  makes  an  entry  only  in  case  it  has  not  already 
made  entries  for  each  invoice  as  received. 

Bill  of  Lading.  When  a  freight  shipment  is  made,  the  railroad  com- 
pany signs  for  the  shipper  a  document  called  a  "bill  of  lading,"  which  serves 
as  a  receipt  for  the  goods,  and  as  a  contract  specifying  the  liability,  the 
rights,  and  the  duties  of  the  shipper  and  of  the  railroad  company.  The 
bill  of  lading  is  in  standard  form. 

Assignment  14,  Page  12 


The  shipper  usually  makes  out  the  bill  of  lading  or  shipping  ticket,  and 
the  railroad  agent  signs  it.  It  shows  (1)  the  name  of  the  shipper,  (2)  the 
name  of  the  party  to  whom  shipped,  (3)  the  name  of  the  railroad  receiv- 
ing it,  (4)  the  routing,  if  it  is  to  travel  over  different  roads  in  going  to  its 
destination,  and  (5)  the  description  and  weight  of  each  package.  If  it  is 
a  carload  shipment,  it  shows  the  number  of  the  car  into  which  it  is  loaded, 
but  does  not  need  to  show  the  details  of  the  articles  or  commodities  in  the 
car.  The  shipping  ticket,  or  bill  of  lading,  should  indicate  whether  the 
freight  is  to  be  prepaid  or  collect. 

The  foregoing  discussion  has  acquainted  you  with  many  of  the  more 
important  and  some  of  the  commoner  forms  and  documents  used  in  busi- 
ness. 

Others  worthy  of  notice  which  may  be  encountered  in  actual  business 
operations  are: 

1.  Plant  and  Equipment  Record  5.  In-Freight  Record 

2.  Consignment  Register  6.  Out-Freight  Record 

3.  In-Bills  Register  7.  Storage  Record 

4.  Claim  Register 

It  is  obvious,  of  course,  that  the  nature  of  the  business  will  determine 
the  nature  of  the  miscellaneous  forms  required. 

An  understanding  of  such  forms  and  their  uses  is  indispensable. 

IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

This  assignment  has  afforded  you  an  opportunity  of  becoming  familiar 
with  the  accounting  significance  of  numerous  auxiliary  records  and  busi- 
ness papers. 

First  of  all,  you  have  seen  the  need  for  such  records  and  papers.  As 
stated  in  the  assignment,  there  are  numerous  business  transactions  that 
require  analysis  and  classification  in  order  that  the  details  will  be  properly 
recorded. 

Second — Some  of  the  most  important  auxiliary  records  were  illustrated 
and  described.    Each  is  auxiliary  to  the  main  accounting  records. 

1.  Insurance  Register — a  record  of  detail  facts  about  insurance 
policies. 

2.  Car-Record  Book — a  detail  record  of  shipments  received  and 
sent. 

3.  Pay-Roll  Book — for  details  of  pay  roll. 

4.  Inventory  Book — a  record  of  goods  on  hand  for  purposes  of 
comparisons. 

5.  Trial-Balance  Book — for  monthly  trial  balances. 

6.  Sales-Tickets  File — preliminary  record  for  sales  in  main  rec- 
ords of  retail  business. 

Assignment  14,  Page  13 


7.     Cash-Register  Strip — provides  totals  for  cash  book. 

Third — The  following  business  papers  were  shown  as  aids  in  collecting 
accounting  data. 

1.  Sales  Invoices — in  wholesale  business. 

2.  Debit  Memorandums — for  returned  material  or  sale  of  equip- 
ment. 

3.  Purchase  Invoices — for  merchandise  and  equipment. 

4.  Credit  m.emorandums — for  returned  sales. 

5.  Statement  of  Account — for  customers. 

6.  Bills  of  lading — in  verifying  details  of  shipments. 

Fourth — Other  business  papers,  such  as  plant  record,  consignment  reg- 
ister, in-bills  register,  etc.,  were  mentioned. 

In  the  problems  that  follow,  you  have  an  opportunity  to  test  yourself 
on  your  knowledge  of  these  books  and  papers. 


Assignment  14,  Page  14 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  14 
Send  in  solutions  for  all  of  the  following  problems : 

1.  State  what  transaction  caused  each  of  the  following  entries :  (All 
the  entries  are  shown  in  the  journal  form  for  convenience,  regardless  of 
the  book  of  original  entry  in  which  they  would  usually  appear.) 

(a)  Petty  Cash  (g)  Cash 

Cash  Sales  Discount 

(b)  Sales  Returns  John  Walters 

I.  M.  Heller  (h)  Allen  &  Company 

(c)  Cash      '      *  Purchase  Returns 

Delivery  Equipment  (i)    Allen  &  Company 

(d)  Cash  Cash 

Interest  Purchase  Discounts 

Notes  Receivable  Discounted  (j)  Interest  Expense 

(e)  Purchases  Notes  Payable 

Notes  Payable  Cash 

(f )  Notes  Receivable  (k)  Delivery  Equipment 
Cash  Cash 

Notes  Receivable  Notes  Payable 

W.  Watson 

2.  Specify  what  business  papers  and  auxiliary  books  are  used  for  the 
following  transactions,  before  they  are  entered  on  the  books  of  account : 

(a)  Borrowed  money  from  the  bank 

(b)  Paid  Granger  &  Company  for  bill  of  merchandise 

(c)  Paid  demurrage  bill  to  Illinois  Central  R.R. 

(d)  Total  cash  sales  for  day 

(e)  Paid  premium  on  fire  insurance  policy  covering  3  years 

(f)  Bought  ink  and  other  office  supplies  on  account 

(g)  Received  note  from  customer  to  cover  his  account 
(h)  Bought  window  shades  for  office  on  account 

(i)  Allowed  credit  to  customer  for  short  weight 
(j)  Shipped  merchandise  to  customer  by  freight 
(k)  Paid  telephone  rental  for  month. 

3.  We  receive  on  October  5  an  invoice  from  the  Northwestern  Coal 
Company  for  a  shipment  of  five  specified  cars  of  coal  on  September  18. 
This  coal  has  been  unloaded  in  our  yards.  How  can  we  find  out  from  our 
records  whether  or  not  we  received  the  coal? 

4.  On  October  15  we  receive  an  invoice  dated  October  14,  terms  2/10, 
n/30.  What  procedure  should  be  followed  before  a  check  is  issued  in  pay- 
ment of  this  invoice? 

5.  From  the  following  balance  sheet  and  profit  and  loss  statement 
shown  on  the  next  page,  set  up  the  trial  balance  as  it  appeared  before 
closing : 


Assignment  14,  Page  15 


William  Rayburn 
BALANCE  SHEET,  DEC.  31,  1921 


Assets 
Current  Assets 

Cash  in  Bank S  588.57 

Accounts  Receivable..  2,694.11 

Notes  Receivable 1,000.77 

Inventory  Dec.  31, 

1921 4,627.60 

Total  Current  Assets $8,911.05 

Fixed  Assets 

Office  Equipment $419.84 

Store  Fixtures 183.60 

Delivery  Equipment. . .   382.50 

Total  Fixed  Assets 985.94 

Deferred  Charges 

Insurance  unexpired 63.93 

$9,960.92 


Liabilities  and  Capital 
Current  Liabilities 

Accounts  Payable $3,618.60 

Notes  Payable 1,718.64 


Total  Current  Liabilities. . .$5,337.24 

Capital 

Capital  July  1,1921  $3,332.55 
Profit  July-Dec.  31.  1,291.13 


Net  Worth 4,623  68 


$9,960.92 


William  Rayburn 
Profit  and  Loss  Statement 
For  Six  Months  Ended  Dec.  31,  1921 


Sales  (gross) $8,709.35 

Returned  Sales 38.27 

Net  Sales $8,671.68 

Inventory  July  1,  1921 $2,945.94 

Purchases 6,348.85 

Freight  In 1,231.65 

$10,526.44 

Inventory  Dec.  31,  1921 4,627.60 

Cost  of  Goods  Sold 5,898.84 

Gross  Profit $2,772.24 

Operating  Expenses: 

Selling  Expenses $1,209.84 

Administrative  Expenses 400.32 

1,610.16 

Net  Operating  Profit $1,162.08 

Other  Income: 

Purchase  Discounts $      106.91 

Interest  Earned 49.35 

156.26 

Charges  to  Income $1,318.34 

Sales  Discounts $        17.21 

Interest  Paid 10.00 

27.21 

Net  Profit $1,291.13 


Assignment  14,  Page  16 


I 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  ^w/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  15 

FINDING,  CORRECTING  and 
PREVENTING  ERRORS 


TT  is  not  amiss  to  point  out  that  the  possession  of  a 
•^  good  ground  work  in  accountancy  is  a  distinct  asset 
of  increasing  importance  for  one  desiring  to  reach  impor- 
tant executive  positions. 

W.  S.  CARPENTER 

Vice-President  and  Treasurer 
E.  I .  DuPont  De  Nemours  <&"  Co. 


LaSalle  Extension  University 

Chicago 


NHA-15 
(n-222) 


ASSIGNMENTS  IN 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectable  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  y\ccouNTiNC — Reorganizations — ^Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — IManufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Overhead 

Distribution 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analyses  of  Financial  Statements — General  Review 

Copyright,  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


FINDING,  CORRECTING,  AND  PREVENTING  ERRORS 

The  making  of  a  single  error  on  the  part  of  a  bookkeeper  sometimes 
becomes  a  serious  matter,  not  only  to  himself,  but  also  to  the  management. 

Here  is  what  happened  in  a  Chicago  furniture  house.  The  bookkeeper, 
who  was  inexperienced  in  locating  errors,  failed  to  post  a  receipt  of  $540.00 
from  Mr.  Smith,  a  customer,  to  Mr.  Smith's  account  in  the  general  ledger. 
As  a  result  of  this  error  several  things  happened. 

First  of  all  the  monthly  trial  balance  failed  to  balance.  The  book- 
keeper spent  hours  looking  for  the  error,  but  in  vain.  The  trial  balance 
was  still  off.  What  was  the  trouble?  Simply  that  he  did  not  know  how 
to  find  his  error.  He  wasn't  familiar  with  the  methods  of  locating  errors. 
It  was  bad  enough  that  a  mistake  had  been  made,  but  it  was  serious  not 
to  be  able  to  find  it. 

Finally  on  the  fifth  of  the  following  month,  his  books  were  turned  over 
to  an  auditor  who  located  the  error  and  showed  the  bookkeeper  how  to 
proceed  in  finding  similar  errors.  But  this  was  not  all.  On  the  seventh 
of  the  month  when  Mr.  Smith  received  his  monthly  statement,  he  was 
billed  for  $540.00  more  than  his  own  books  showed.  He  was  being  over- 
charged, so  he  demanded  an  explanation.  Naturally  he  took  up  the  mat- 
ter with  the  proprietor. 

In  looking  up  Mr.  Smith's  account,  it  was  found  that  the  error  had 
been  corrected,  but  too  late  to  avoid  sending  out  a  wrong  statement.  After 
an  explanation,  the  matter  was  finally  adjusted  and  the  customer  satisfied. 
In  the  meantime,  however,  hours  had  been  spent  in  useless  searching, 
which  might  have  been  saved  had  the  bookkeeper  been  sufficiently  trained 
in  accounting;  and  what  is  more  important  the  good  will  of  a  customer  had 
been  almost  destroyed.  All  of  this  was  the  result  of  one  error  on  the  part 
of  the  bookkeeper. 

Errors  like  this  are  bound  to  get  into  the  double  entry  records  at  almost 
any  place  unless  special  care  is  exercised.  That  is  why  we  take  a  trial  bal- 
ance periodically — to  test  the  correctness  of  the  debit  and  credit  entries; 
in  other  words,  to  prove  the  mechanical  accuracy  of  all  previous  work  on 
the  books. 

From  a  brief  review  of  previous  assignments,  dealing  with  the  various 
phases  of  bookkeeping,  an  outline  of  this  work  preceding  the  trial  balance 
may  be  presented.  Each  step  gives  opportunities  for  errors.  The  essential 
steps  in  the  recording  of  transactions  are  as  follows: 

1.  A  memorandum  of  the  transaction  with  all  necessary  facts. 

2.  Analysis  of  the  transaction  into  its  debit  and  credit  elements. 

3.  Entry  of  the  transaction  in  some  one  of  the  journals  or  books  of  original  entry. 

4.  Footing  and  equalizing,  or  proving  the  journals. 

5.  Posting  debits  and  credits  respectively  to  the  ledger,  with  folio  cross  refer- 
ence. 

6.  Footing  and  balancing  the  ledger  accounts. 

NHA-15 


7.  Taking  a  preliminary  trial  balance  to  establish  equality  of  debits  and  credits 
in  the  ledger. 

8.  Making  closing  entries  to  transfer  and  summarize  the  profit  and  loss  accounts, 
also  to  determine  the  net  profit  for  the  period. 

9.  Posting  the  closing  entries  and  taking  a  trial  balance  of  accounts  after  the 
closing  process. 

10.  Setting  up  of  a  balance  sheet  from  the  post  closing  trial  balance,  and  profit 
and  loss  statement  from  the  Profit  and  Loss  Summary  Account. 

Each  of  these  steps  requires  careful  work,  and  if  calculations  and  post- 
ings are  closely  scrutinized  the  trial  balance  and  subsequent  work  will  be 
mathematically  correct.  This,  however,  does  not  include  wrong  ideas  as 
to  the  nature  of  transactions,  or  in  other  words,  of  principle.  The  detec- 
tion of  mistakes  of  this  kind  is  more  a  matter  of  auditing  and  will  be  taken 
up  later  in  connection  with  Auditing  Procedure,  together  with  the  discus- 
sion of  principles  which  govern  the  proper  analysis  and  classification  of 
entries. 

The  possibility  of  making  errors  always  exists,  and  an  accountant 
should  know  how  to  locate  and  correct  them  and  suggest  methods  for 
preventing,  or  at  least  limiting,  the  possibility  of  mistakes. 

The  Chief  Causes  of  Errors.  Errors  in  accounting  work  may  arise 
from  one  or  more  general  underlying  causes,  such  as  carelessness,  undue 
strain,  or  lack  of  training  in  accounting  principles. 

This  results  in  such  errors  as  the  following: 

1.  Errors  in  addition,  subtraction,  or  multiplication 

2.  Errors  in  copying 

3.  Charges  or  credits  to  wrong  accounts 

4.  Omission  and  duplication  of  items 

5.  Errors  in  debits  and  credits 

Errors  in  dealing  with  figures  are  due,  frequently,  to  the  carelessness 
with  which  the  figures  are  first  recorded  and  the  lack  of  close  attention  in 
the  subsequent  handling  of  them.  Poorly  made  figures  are  a  constant 
source  of  trouble.  Often  a  4  is  so  badly  made  as  to  resemble  a  9;  some- 
times the  dash  is  left  off  a  5  and  the  figure  is  taken  as  a  6  in  subsequent 
calculations.  The  downward  stroke  of  a  9  may  be  carried  into  the  line 
below  in  such  a  way  that  it  makes  a  6  out  of  a  0.  Figures  scratched  over 
each  other  are  always  a  cause  of  error;  and  figures  on  unruled  paper  are 
very  hard  to  add  correctly. 

Lack  of  Training  in  Accounting  Principles.  The  bookkeeper  may  not 
be  familiar  with  certain  fundamental  accounting  principles  and  may  vio- 
late these  principles  in  analyzing  certain  transactions.  For  example,  he 
may  charge  the  purchase  of  delivery  equipment  to  the  Expense  Account, 
thus : 

Dr.  Expense $950.00 

Cr.  Cash $950.00 

when  it  should  be  charged  to  the  Asset  Account. 

Dr.  Delivery  Equipment $950.00 

Cr.  Cash  $950.00 

Assignment  15,  Page  2 


Since  this  is  obviously  a  capital  expenditure,  it  should  be  charged  to  the 
Asset  Account  instead  of  the  Expense  Account. 

Sometimes  an  operating  expense  is  charged  incorrectly  to  an  Asset 
Account  thus: 

Dr.  Buildings $150.00 

Cr.    Cash $150.00 

Paying  X.Y.Z.  &  Co.  for  replacing  window  shades. 

Since  this  is  an  operating  expense,  the  correct  entry  would  be; 

Dr.  Expense $150.00 

Cr.  Cash _ $150.00 

THE  FINDING  OF  ERRORS 

As  previously  stated,  the  preclosing  trial  balance  is  the  logical  place  to 
detect  errors.  There  is  where  we  would  naturally  begin,  but  some  errors 
may  exist  within  the  ledger  which  will  not  affect  the  trial  balance.  For 
example,  one  error  on  the  debit  side  may  offset  another  error  of  equal 
amount  on  the  credit  side.  In  other  words,  even  tho  the  totals  of  the  trial 
balance  agree,  this  would  not  be  absolute  proof  that  the  ledger  is  without 
error.  If,  however,  the  trial  balance  is  out  of  balance,  there  is  positive 
proof  that  some  error  exists. 

Procedure  When  Trial  Balance  Totals  Do  Not  Agree.  There  is  no 
definite  rule  for  locating  any  and  all  errors,  except  by  going  over  all  work. 
There  are  several  preliminary  tests,  however,  which  may  indicate  where 
the  error  exists.  Very  often  a  single  error  can  be  located  quickly  and  cor- 
rected immediately.  It  is  usually  worth  while  to  apply  these  tests  before 
undertaking  the  work  of  checking  back  all  postings  and  calculations. 

The  first  step,  of  course,  is  to  readd  the  trial  balance.  All  work  may 
be  correct,  but  the  final  addition  of  the  columns  may  be  wrong.  If  the 
addition  is  correct  for  the  figures  as  they  appear,  it  is  clearly  indicated 
that  the  trouble  is  to  be  found  in  some  previous  step.  A  survey  of  possi- 
bilities shows  that  the  error  may  be  due  to : 

1.  Posting  an  item  to  the  wrong  side  of  an  account. 

2.  An  error  in  copying  when  transferring  a  balance  from  the  general 
ledger  account  to  the  trial  balance. 

3.  Omission  of  a  debit  or  credit  amount  which  should  have  been  posted. 

4.  Posting  the  same  item  twice. 

5.  An  error  in  addition,  bringing  down  the  balance  of  an  account  in  the 
general  ledger. 

Practical  Rules  for  Locating  Differences.  There  are  several  ways  of 
trying  out  the  difference  between  the  debit  and  credit  sides  of  a  trial  bal- 
ance which  may  lead  to  a  quick  location  of  the  error. 

1.  A  difference  of  .01,  .10,  1.00,  etc.,  suggests  that  an  error  has  been 
made  in  addition  or  subtraction. 

2.  A  difference  of  9  or  a  multiple  of  9  indicates  a  transposition  of 
figures. 

Assignment  15,  Page  3 


3.  A  difference  divisible  by  2  indicates  an  error  in  posting  to  the  wrong 
side  of  an  account,  or  carrying  a  debit  amount  to  the  credit  side,  or 
vice  versa. 

4.  A  difference  divisible  by  9  or  99  indicates  an  error  in  shifting  the 
decimal  point. 

If  the  difference  between  the  two  sides  of  a  trial  balance  is  .01,  .10,  1.00, 
etc.,  the  error  is  probably  one  of  addition  or  subtraction.  This  assumption 
may  be  made,  because  in  adding  a  long  list  errors  of  1  are  more  likely  to 
occur  than  errors  of  2  or  3.  Sometimes  in  working  rapidly,  5  and  6  will 
be  added  11 — the  first  1  will  be  put  down  correctly,  but  the  second  1  will 
not  be  carried  forward.  A  larger  number  to  be  carried  forward  is  more 
likely  to  be  carried  forward  correctly. 


TRIAL  BALANCE 

Debit     Credit 

Cash $   672.40 

Purchases  2,146.80 

Expense  339.40 

Buildings  and  Land 3,600.00 

Accounts  Receivable  3,663.63 

Sales •.  .  .  $  4,695.83 

Accounts  Payable 726.40 

Capital  5,000.00 


$10,422.23     $10,412.23 


Figure  1. — ^This  is  a  simple  illustration.    The  error  is  quite  apparent  and  not  difficult 

to  locate. 

When  the  Diflference  Is  Divisible  by  9.  If  the  error  is  divisible  by  9  it 
can  be  assumed  that  certain  figures  have  been  transposed.  It  can  be  fur- 
ther determined,  that  only  certain  figures  have  been  copied  in  error  since 
there  must  be  a  certain  relation  between  the  figures  to  create  the  dif- 
ference. Suppose  the  difference  amounts  to  18.  Dividing  the  difference — 
18 — by  9  gives  a  quotient  of  2.  Subtract  this  quotient  from  99  (the  highest 
multiple  of  9  requiring  two  columns),  and  the  remainder  is  97.  This 
establishes  the  first  possibility ;  97  may  have  been  written  79.  Other  pos- 
sibilities may  be  determined  by  subtracting  11  (1  in  the  tens  column  and 
1  in  the  unit  column)  from  97.  The  remainder  is  86.  Successive  subtrac- 
tions of  11  will  give  the  other  possible  figures  which  may  be  reversed  with 
the  same  result.  Any  of  the  following  amounts  (and  transpositions)  will 
create  a  difference  of  18 : 

97—79,  86—68,  75—57,  64—46,  53—35,  42—24,  31—13,  20—02. 

This  method  helps  to  localize  errors  of  transposition  and  excludes  all 
amounts  not  subject  to  the  test.    (See  Figure  2.) 


AssigiMnent  15,  Page  4 


TRIAL  BALANCE 

Debit  Credit 

Accounts  Receivable  $  6,378.24 

Accounts  Payable $  6,414.86 

Cash 10,435.64 

Capital   5,000.00 

Expense  629.40 

Land  and  Buildings 4,200.00 

Sales 8,127.38 

Surplus   2,101.22 


$21,643.28     $21,643.46 


Figure  2. — There  are  two  possibilities  in  this  case,  and  since  the  error  cannot  be  located 

on  the  face  of  the  trial  balance,  the  accounts  must  be  investigated.    It  is  not  necessary, 

however,  to  examine  all  of  them.    It  is  possible  to  limit  the  investigation,  first  to  the 

Accounts  Receivable  and  Accounts  Payable  Accounts. 

The  ledger  shows — 

Accounts  Receivable  balance - $6,378.42 

Accounts  Payable  balance 6,414.86 

The  ledger  might  have  shown — 

Accounts  Receivable  balance $6,378.24 

Accounts  Payable  balance „ 6,414.68 

In  either  case  a  correction  in  the  trial  balance  will  bring  the  totals  into 
agreement. 

Notice  also  that  the  last  two  figures  of  the  cash  amount  present  a 
possibility  of  reversed  figures,  the  result  being  a  difference  of  18,  but  if 
the  figures  are  changed  it  would  result  in  a  further  reduction  of  the  debit 
side  which  is  already  less  than  the  credit  side.  On  this  account  the  Cash 
Account  would  not  be  suspected  as  being  wrong. 

Some  people  have  a  habit  of  reading  figures  reversed.  They  should 
exert  themselves  to  the  utmost  to  break  up  the  habit. 

When  the  Difference  Is  Divisible  by  2.  Sometimes  an  account  balance 
will  find  its  way  to  the  wrong  column  of  the  trial  balance,  as  when  a  credit 
balance  is  shown  in  the  debit  column,  or  an  item  has  been  posted  to  the 
wrong  side  of  an  account.  This  will  cause  an  error  of  twice  the  amount  of 
the  item  which  has  been  wrongly  transferred.     (See  Figure  3.) 

It  is  always  advisable,  therefore,  when  looking  for  an  error,  to  divide 
the  difference  by  two  and  consider  the  possibility  of  the  half  being  in  the 
wrong  column  of  the  trial  balance  or  on  the  wrong  side  of  some  ledger 
account. 


Assignment  15,  Page  5 


Whenever  the  same  debit  or  credit  is  posted  twice,  or  when  a  debit  or 
credit  is  omitted  in  posting,  the  amount  of  the  error  will  be  the  difference 
between  the  two  sides  of  the  trial  balance,  provided  of  course  no  other 
errors  have  been  made. 


TRIAL  BALANCE 

Detit     Credit 

Cash S  7,580.00 

Purchases  1,800.00 

Expense  .  - $   170.00 

Accounts  Receivable  800.00 

Office  Furniture 1,150.00 

Sales 2,400.00 

Accounts  Payable 600.00 

Capital  8,500.00 


Total   $11,330.00     $11,670.00 


Figure  3. — The  difference  between  the  two  sides  of  this  trial  balance  is  $340.00.  By 
dividing  $340.00  by  2  and  looking  for  half  this  amount  we  find  that  the  balance  of  the 
Expense  Account  was  entered  in  the  wrong  column  of  the  trial  balance.    Another  case 

is  illustrated  in  Figure  4. 


i 

Cash 

TRIAL  BALANCE 

Debit 
.  .  S  7,580.00 

Credit 

$  2,400.00 

600.00 

8,505.00 

Purchases  

1  800.00 

Expense  

160  00 

Accounts  Receivable  .  .  . 

.  .     465.00 

Office  Furniture 

.  .    1,150.00 

Sales  

Accounts  Payable 

Capital 

Total  

.  .  $11,155.00 

$11,505.00 

Figure  4. — In  this  case  the  total  credits  exceed  the  total  debits  by  $350.00.  One-half 
of  this  amount  is  $175.00.  Apparently  the  mistake  is  not  on  the  trial  balance  itself, 
for  there  is  no  such  amount  shown.  The  details  of  the  accounts  are  not  shown  in  this 
illustration,  but  a  sale  on  account  for  $175.00  posted  to  the  credit  side  of  Accounts 
Receivable,  instead  of  to  the  debit  side,  would  account  for  such  a  difference. 

.  Slide,  or  Misplacement  of  Decimal  Point.  It  is  lack  of  attention  in  read- 
ing the  decimal  point  that  leads  a  person  sometimes  to  write  2,000.00  for 
200.00,  or  to  post  200.50  instead  of  250.00.  Accurate  concentration  would 
lead  to  "thinking"  the  figure  correctly,  two  hundred  and  fifty  dollars — 
not  two  hundred  and  fifty.  Errors  due  to  misplacing  the  decimal  point 
are  also  divisible  by  9  or  99.  This  should  not  be  confused  with  reversed 
figures,  because  the  mistake  is  of  a  different  nature.    If  the  decimal  point 

Assignment  15,  Page  6 


has  been  misplaced  by  a  one-column  slide  (8.00  instead  of  .80),  the  error 
is  divisible  by  9.  An  error  due  to  a  two-column  slide  (200.00  instead  of 
2.00)  is  divisible  by  99,  etc.    (See  Figure  5.) 


TRIAL  BALANCE 

Debit,     Credit 

Accounts  Receivable  $  5,004.47 

Accounts  Payable $  3,156.57 

Cash 3,614.75 

Capital  10,000.00 

Expense  3,515.71 

Merchandise  Purchases  5,052.02 

Plant 4,250.00 

Machinery  and  Equipment  2,675.00 

Sales 8,557.88 

Surplus  2,150.00 


$24,111.95     823,864.45 


Figure  5. — The  total  of  the  debit  side  is  $247.50  greater  than  the  credit  side.  This  dif- 
ference is  divisible  by  99,  which  leads  us  to  suspect  a  two-column  slide.  Since  the  debit 
side  is  greater,  let  us  examine  the  possibilities.  247.50  -^  99  =  2.50.  This  amount 
($2.50)  added  to  the  difference  ($247.50)  equals  $250.00.  We  can  see  that  the  Plant 
Account  is  subject  to  the  test.  On  looking  up  this  account  in  the  ledger,  it  appears  that 
four  thousand,  two  dollars,  fifty  cents    ($4002.50)   has  been  written  four  thousand, 

two  hundred  and  fifty  dollars. 

Sometimes  the  difference  is  an  amount  such  as  $52.68  or  $783.97  or 
$.29.  These  figures  do  not  suggest  an  application  of  the  foregoing  tests, 
that  is,  they  do  not  appear  to  be  due  to  errors  in  addition,  transposition, 
or  misplacement  of  the  decimal  point.  There  are  numerous  possibilities  in 
this  case,  and  a  consistent,  systematic  examination  of  the  work  is  neces- 
sary. A  plan  should  be  adopted  by  which  the  accounts  will  be  covered 
once  and  in  the  most  logical  manner.  A  good  plan  is  to  begin  with  the 
trial  balance  and  trace  the  work  back  thru  the  various  accounts  instead 
of  repeating  the  process  of  doing  all  the  work  leading  up  to  the  trial 
balance : 

1.  Check  the  Trial  Balance. 

(a)  Check  addition  of  totals. 

(b)  Check  all  accounts  on  trial  balance  b'ack  to  the  accounts  as  they 
appear  on  the  ledger,  being  careful  to  see  that  the  amounts  are 
on  the  correct  side. 

2.  Check  the  accounts  in  the  general  ledger. 

(a)  Examine  footings  and  balance  of  each  account. 

(b)  Check  postings  from  books  of  original  entry. 

3.  Check  entries  in  books  of  original  entry. 

Assignment  15,  Page  7 


Errors  in  the  Ledger.  Errors  can  easily  be  made  in  ruling  up  an  ac- 
count and  bringing  down  the  balance.  It  is  easy  to  write  as  the  new  bal- 
ance below  the  ruling  the  total  which  stands  just  above  it,  or  to  twist 
about  the  figures  so  that  the  balance  below  the  lines  is  not  the  same  as  the 
one  above  them  on  the  opposite  side  of  the  account.  A  balance  may  even 
be  left  above  the  ruling  and  not  be  brought  down  at  all.  Again,  in  carry- 
ing an  account  forward  to  a  new  page,  the  balance  or  the  totals  of  each 
side  may  be  transferred  incorrectly.  All  these  things  will,  of  course,  pro- 
duce an  error  in  the  trial  balance  which  can  be  easily  detected  by  inspect- 
ing the  closed  or  forwarded  accounts. 

Reverse  Posting — A  Means  of  Localizing  Errors.  If  the  error  cannot 
be  traced  by  any  of  the  methods  which  have  been  described,  you  should 
work  back  from  the  ledger  to  the  books  of  original  entry.  This  is  called 
reverse  posting  or  abstracting  the  ledger.  This  reverse  posting  is  not 
difficult,  provided  you  thoroly  understand  it. 

To  illustrate  the  procedure,  we  will  take  the  accounts  as  they  would 
appear  in  the  General  Ledger,  and  reproduce  them  in  Figure  6. 


CASH 


DATE 

ITEMS 

Fol. 

V 

DEBI 

rs 

DATE 

ITEMS 

Fol. 

V 

CREDITS 

1922 

Jan. 

Jan. 

1 
31 

Balance 

625 

00 

1922 

Jan. 

31 

(C.B.) 

2,497 

75 

(C.B.) 

2,570 

25 

- 

ACCOUNTS  RECEIVABLE 


1922 

Jan. 

1 

Balance 

2,182 

90 

1922 
Jan. 

31 

(C.B.) 

1,885 

25 

Jan. 

31 

(S.B.) 

3,018 

10 

Jan. 

31 

(J.) 

412 

08 

Jan. 

31 

(J.) 

125 

00 

NOTES  RECEIVABLE 


1922 

Jan. 
Jan. 

1 
31 

Balance 

(J.) 

990 
125 

00 
00 

1922 
Jan. 

srti. 

31 

(C.B.) 

200 

00 

(Forms  continued  on  next  page) 


Assignment  15,  Page  8 


MERCHANDISE  INVENTORY 


1922 
Jan. 

1 

Balance 

1,893 

26 

1922 

PURCHASES 


1922 
Jan. 

31 

(P.B.) 

2,381 

50 

1922 
Jan. 

31 

(J.) 

288 

10 

ACCOUNTS  PAYABLE 


1922 
Jan. 

31 

(C.B.) 

2,128 

65 

11922 
Jan. 

1 

Balance 

1,128 

50 

Jan. 

31 

(J.) 

288 

10 

Jan. 

31 

(P.B.) 

2,381 

50 

1 

SALES 


1922 
Jan. 

31 

(J.) 

408 

12 

1922 

Jan. 

31 

S.B. 

3,018 

10 

Jan. 

31 

(C.B.) 

485 

00 

EXPENSE 


1922 
Jan. 

31 

(C.B.) 

369 

10 

1922 

CA 

PI 

TAL 

1922 

1922 
Jan. 

1 

Balance 

4,562 

66 

Ledgeb  Accounts 

Figure  6. — These  ledger  accounts  are  out  of  balance.     To  find  the  error  we  shall 
abstract  the  ledger  as  shown  in  Figure  7. 

If  you  will  take  a  trial  balance  of  the  accounts  shown,  you  will  find  that 
the  credit  side  exceeds  the  debit  side  by  $3.96.  Instead  of  checking  back 
the  postings,  you  can  localize  the  error  by  abstracting  from  the  ledger, 
first,  the  debit  postings,  and  then  the  credit  postings,  according  to  books 
of  original  entry  from  which  the  postings  were  made.  The  analysis  of  the 
above  ledger  is  shown  in  Figure  7. 


Assignment  15,  Page  9 


ANALYSIS  OF  DEBIT  POSTINGS 

Accounts 

Debit 

Balance 

Jan.  1 

Cash 
Book 

Journal 

Purchase 
Book 

Sales 
Book 

Gross 
Debits 
Jan.  31 

Cash 

$     625 

00 

$2,570 

25 

$  3,195 

25 

Accounts  Receivable 

2,182 

90 

$3,018 

10 

5,201 

00 

Notes  Receivable 

990 

00 

$125 

00 

1,115 

00 

Mdse.  Inventory 

1,893 

26 

1,893 

26 

Purchases 

$2,381 

50 

2,381 

50 

Accounts  Payable 

2,128 

65 

288 

10 

2,416 

75 

Sales 

408 

12 

408 

12 

Expense 

369 

10 

369 

10 

Capital 
TOTALS 

S5,691 

16 

$5,068 

00 

$821 

22 

$2,381 

50 

$3,018 

10 

$16,979 

98 

Abstract  of  the  Ledger 

Figure  7.     This  statement  is  made  up  from  the  ledger  accounts  in  Figure  6.     The 
amounts  are  classified  according  to  the  books  of  original  entry  from  which  they  were 

Explanation  of  the  Analysis.  In  this  analysis  sheet  you  will  observe 
that  a  column  is  provided  for  each  book  of  original  entry  and  one  line  for 
each  account.  If  there  are  many  items  from  each  book  of  original  entry, 
more  than  one  line  for  each  account  should  be  allowed. 

You  notice  that  the  debits  and  credits  for  each  book  of  original  entry 
agree  except  those  of  the  journal.  The  credits  posted  from  the  journal 
are  $3.96  more  than  the  debits.  This  is  the  amount  of  the  difference  in 
the  trial  balance.  We  have,  therefore,  localized  the  error  in  the  journal. 
An  examination  of  the  journal  entries  for  the  month  will  disclose  either 
an  error  in  posting  from  the  journal  or  an  error  in  the  journal  itself.  In 
this  case,  we  find  that  when  the  bookkeeper  posted  the  return  sales  of 
$412.08,  he  posted  it  as  $408.12. 

This  method  of  reversing  the  postings  will  localize  the  error,  but  will 
not  always  disclose  the  nature  of  the  mistake  made  without  still  further 
examination.  It  does,  however,  enable  you  to  discover  the  error  more 
quickly  than  if  you  were  to  check  the  postings  item  by  item.  This  method 
of  finding  errors  is  frequently  used  by  public  auditors,  as  it  eliminates  the 
necessity  of  making  undesirable  check  marks  on  the  books  and  also  fur- 
nishes the  auditor  with  a  complete  abstract  of  the  books  for  his  own  files. 

Errors  in  Books  of  Original  Entry.  It  is  advisable  to  begin  with  the 
folio  columns  of  the  books  of  original  entry  for  any  unposted  items.  Such 
items  would  show  up  quickly  because  of  the  vacant  spaces  in  the  folio 
column  where,  properly,  there  should  be  ledger  page  numbers.     Especial 


Assignment  15,  Page  10 


ANALYSIS  OF  CREDIT  POSTINGS 


Accounts 

Credit 
Balance 
Jan.  1 

Cash 
Book 

Journal 

Purchase 
Book 

Sales 
Book 

Gross 
Credits 
Jan.  31 

Cash 

$2,497 

75 

$  2,497 

75 

Accounts  Receivable 

1,885 

25 

$412 
125 

08 
00 

2,422 

33 

Notes  Receivable 

200 

00 

200 

00 

Mdse .  Inventory 

Purchases 

288 

10 

288 

10 

Accounts  Payable 

$1,128 

50 

$2,381 

50 

3,510 

00 

Sales 

485 

00 

$3,018 

10 

3,503 

10 

Expense 

> 

Capital 

TOTALS 

Difference  between 

4,562 

66 

$825 

18 

4,562 

66 

$5,691 

16 

$5,068 

00 

$2,381 

50 

$3,018 

10 

$16,983 

94 

Dr.   and  Cr. 

$3 

96 

$3 

96 

Abstract  of  the  Ledger 

posted.    Thus,  totals  are  obtained  and  the  error  is  localized,  that  is,  you  can  determine 
in  what  book  of  original  entry  the  error  was  made.    In  this  case  the  error  was  made  in 

the  journal. 

attention  should  be  given  at  this  point  to  the  posting  of  totals,  since  the 
totals  are  more  likely  to  be  overlooked  in  posting  than  the  details. 


CORRECTION  OF  ERRORS  \ 

Whatever  the  cause  of  errors,  they  can  be  found.  Where  the  amount 
of  the  difference  plainly  suggests  some  particular  type  of  error,  time  aid 
labor  may  be  saved  by  applying  the  tests  previously  described.  If  these 
tests  do  not  reveal  the  error,  the  work  must  be  carefully  rechecked.  .\n 
error  must  be  found,  no  matter  how  small  it  might  be.  An  error  of  13 
cents  may  be  the  net  result  of  several  errors  of  large  amount,  some  pf 
which  may  be  of  considerable  importance.  1 

Careless  Corrections  May  Cause  Other  Errors.  Errors  should  alwajs 
be  corrected  at  once,  carefully  and  completely.  This  last  phrase  is  added 
advisedly,  because  the  correction  of  errors  is  often  the  source  of  other 
errors.  An  error  in  writing  a  figure  may  be  detected  easily.  If  it  be  cor- 
rected by  writing  over  the  figure  the  resulting  "sign"  (it  can  hardly  le 
called  a  figure)  may  often  cause  an  exasperating  error  later.  Cases  aie 
known  where  entries  have  been  corrected  by  moving  an  amount  from  on?i 
column  to  another  in  a  book  of  original  entry  without  altering  the  total  oi 
the  column,  the  total  to  be  posted  later.    In  such  a  case  correcting  the  error 

\ 
Assignment  15,  Page  11 


will  cause  another,  or  at  best  permit  a  part  of  the  original  mistake  to 
stand.  It  is  important,  therefore,  that  you  Make  Corrections  Carefully, 
Thoroly,  and  Completely. 

Where  to  Begin  in  Correcting  Errors.    When  the  error  exists  in  the 

trial  balance,  and  the  ledger  is  correct,  it  will  be  necessary  only  to  set  up 
a  new  trial  balance,  and  correct  the  wrong  amounts.  But  when  the  trial 
balance  fails  to  balance  because  of  mistakes  in  the  ledger  or  in  books  of 
original  entry,  these  mistakes  should  be  corrected  first  at  the  source.  In 
other  words,  do  not  correct  the  trial  balance  first  and  then  later  correct 
the  ledger  and  books  of  original  entry.  You  may  forget  to  correct  the 
error  itself,  and  thus  leave  the  books  still  out  of  balance.  The  best  way  is 
to  correct  the  errors  on  the  books  of  account  first,  and  after  all  corrections 
have  been  made  then  take  a  trial  balance  for  final  verification. 

Practical  Suggestions  on  How  to  Make  Corrections.  Do  not  erase 
errors.  Accountants  are  strongly  opposed  to '•altering  figures  by  scratch- 
ing or  rewriting  them.  Dishonesty  is  sometimes  concealed  beneath 
scratched  figures;  they  are,  therefore,  the  subject  of  extra  close  scrutiny, 
not  to  say  suspicion.  Besides,  an  erasure  usually  results  in  unsightly 
books  with  the  ink  spreading  over  the  roughened  surface,  often  to  the 
extent  of  rendering  the  amounts  indistinct.  A  safe  rule  to  follow  is:  Do 
not  make  corrections  in  a  way  that  may: 

(a)  Cause  confusion  in  the  verification  or  analysis  of  ledger  accounts. 

(b)  Impair  the  value  of  books  of  original  entry  as  evidence  in  a  court 
'          of  law. 

,  (c)  Destroy  the  neatness  of  the  records. 

How  to  Proceed  in  Correcting  Errors.  First  of  all  the  nature  of  the 
error  should  be  determined  and  the  correction  made  accordingly . 

1.  Cancel  the  original  entry  and  make  a  new  entry.  Most  mechanical 
aTors,  such  as  miscopying  amounts,  posting  to  the  wrong  side  of  an  ac- 
count, errors  in  addition,  incorrect  balances,  failure  to  post  a  debit  or  a 
credit  to  an  account,  etc.,  should  be  ruled  out  neatly  with  red  ink,  and  the 
orrect  amount  should  be  entered  in  the  proper  place.  The  date  of  making 
tie  correction  and  the  initials  of  the  person  correcting  the  error  should  be 
sdded,  for  the  sake  of  having  a  complete  record.  If  this  error  has  affected 
other  accounts  the  correction  should  be  made  there  also;  otherwise  the 
direct  entry  will  cause  still  greater  confusion. 

2.  Enter  all  items  that  have  been  omitted.  All  transactions  which  were 
omitted  in  books  of  original  entry  should  be  entered  in  the  proper  books, 
isually  at  the  bottom,  the  totals  corrected,  and  the  correct  totals  posted. 

3.  Correction  of  errors  in  principle.  Errors  in  principle  require  a  jour- 
nal entry  that  will  reverse  the  incorrect  entry.  For  example,  if  you  find 
that  the  purchase  of  delivery  equipment  has  been  charged  to  an  expense 

Assignment  15,  Page  12 


account  instead  of  to  an  asset  account,  you  will  make  this  correcting 
journal  entry: 

Dr.  Delivery  Equipment $ 

Expense  $ 

To  correct  an  improper  charge  to  the  Expense  Account  for 
the  purchase  of  delivery  equipment. 

After  the  journal  entry  is  made,  it  must  be  posted,  and  the  error  in  the 
accounts  corrected  by  red  line  rulings. 

PREVENTION  OF  ERRORS 

In  developing  the  double  entry  system  of  accounts  thruout  the  preced- 
ing assignments,  we  have  frequently  suggested  specific  devices  of  safe- 
guarding the  accounting  records  against  errors.    The  more  important  are 

as  follows: 

1.  The  journal  was  introduced  to  assure  a  more  careful  analysis  of  the  debits 
and  credits  before  the  transactions  are  entered  in  the  ledger. 

2.  The  folio  column  in  the  journal  and  ledger  provides  an  accurate  cross  refer- 
ence by  which  any  omissions  in  posting  can  be  detected. 

3.  Special  journals  provide  greater  accuracy  in  the  original  entry,  because  only 
certain  types  of  transactions  are  entered  in  certain  books,  as,  for  example, 
cash  items  in  the  cash  journal. 

4.  The  trial  balance  before  closing  or  "proof  sheet"  is  a  test  of  the  equality  of 
debits  and  credits  in  the  ledger. 

5.  The  trial  balance  after  closing  proves  the  correctness  of  the  closing  process. 

6.  Controlling  accounts  are  set  up  in  the  general  ledger  to  serve  as  a  control  on 
the  accuracy  of  the  detail  accounts  in  the  subsidiary  ledger. 

Care  Necessary  in  Making  Additions.  There  is  only  one  way  of  pre- 
venting errors  and  that  is  to  train  yourself  to  handle  figures  accurately. 
Intelligent  training  means  more  than  blindly  adding  and  adding  until 
accuracy  is  finally  acquired  by  mere  repetition.  So  many  errors  are  made 
in  addition  that  anyone  who  constantly  deals  with  figures,  naturally  wishes 
to  improve  as  rapidly  as  possible.  When  concentration  is  acquired  by 
habit,  accurate  adding  becomes  easy,  for  the  absence  of  strain  in  forcing 
the  mind  to  combine  figures  leaves  that  much  more  energy  free  to  the  task 
of  holding  the  attention  on  the  amount  carried  over  to  the  next  column. 

Transfer  of  Figures.  Adding,  however,  is  not  the  only  operation  where 
attention  needs  training.  Figures  must  be  transferred  from  place  to  place, 
as  well  as  added.  There  are  three  steps  in  the  mental  effort  of  transferring 
figures :  ^  j 

1.  Reading  the  original  amount. 

2.  Mentally  carrying  the  amount  to  another  page.  ( 

3.  Writing  the  amount  carried  in  mind. 

The  best  advice  here  is  to  think  the  amount.  Do  not  be  content  merely 
to  carry  a  visual  image  of  the  figures.  Think  the  amount  as  clearly  and  in 
the  same  words  as  if  you  were  calling  it  aloud.    If  you  think  the  figure 

Assignment  15,  Page  13 


when  reading  it,  and  again  when  writing  it,  you  will  find  the  mind  will 
carry  the  amount  over  safely  enough.  Some  people  murmur  the  figures 
under  their  breath,  but  generally  this  is  a  makeshift  for  training  in  think- 
ing figures.  Thinking  is  a  faster  mental  process  than  talking,  and  it  may 
be  made  just  as  clear  and  connected. 

Checking  Postings  at  the  Time  Amounts  Are  Posted.  If  you  check 
your  postings  immediately  at  the  time  when  the  amount  is  posted,  you  will 
prevent  numerous  errors.  Sometimes  the  practice  is  to  recheck  all  post- 
ings, say  at  the  end  of  each  day.  This  prevents  errors  from  accumulating, 
but  involves  a  duplication  of  the  posting  effort.  Many  of  the  best  book- 
keepers follow  the  plan  of  checking  the  posting  at  the  time  it  is  made. 
This  means  more  than  merely  putting  a  pencil  mark  after  the  figures ;  it 
involves  a  special  mental  effort.  If  you  can  develop  the  faculty  of  erasing 
from  your  mind  the  figures  just  posted,  you  can  then  look  at  the  amount 
before  you  in  the  ledger  as  a  new  and  strange  figure. 

Having  this  mental  attitude,  it  is  an  easy  matter  to  look  back  to  the 
book  of  original  entry  for  the  amount  posted  and  verify  the  figures  trans- 
ferred. A  little  practice  makes  this  a  very  effective  method  of  checking, 
which  will  save  a  great  deal  of  time.  It  is  time  saving  to  scan  again  the 
figures  while  they  are  before  you  rather  than  turn  pages  later  to  find 
them. 

Internal  Check.  Most  devices  which  are  intended  to  "catch  the  error 
young,"  before  it  has  become  buried  too  deep  in  the  records,  are  classed 
as_  "internal  checks."  The  principle  of  internal  check,  briefly  stated,  is 
this:  Where  the  same  facts  are  worked  over  by  two  or  more  people,  the 
two  sets  of  results  afford  a  means  of  testing  the  accuracy  of  the  record. 
This  principle  is  based  upon  the  general  experience  that  two  persons  are 
very  unlikely  to  make  the  same  error ;  if  their  work  agrees,  it  is  very 
probably  correct. 

Not  only  is  the  internal  check  valuable  for  finding  errors  early,  but  it 
also  prevents  fraudulent  entries,  intentionally  made  to  misrepresent  facts. 

You  have  already  had  one  example  of  the  internal  check  in  controlling 
accounts  for  the  subsidiary  ledgers  of  customers  and  creditors. 

If  you  go  into  any  bank  you  will  also  find  the  internal  check  in  use. 
The  deposit  tickets  received  by  the  teller  are  totaled  by  him  before  they 
are  handed  over  to  the  ledger  clerk  for  posting  to  the  individual  accounts. 
Then  after  the  posting  of  the  day  is  finished,  the  ledger  clerk  takes  off  a 
list  from  the  ledger  of  the  deposits  posted.  The  total  of  this  list  must 
agree  with  the  total  of  the  list  obtained  by  the  receiving  teller.  If  it  does 
not  agree,  the  work  should  be  rechecked  until  the  discrepancy  is  accounted 
for. 

Methods  of  Proving  Your  Work.  The  importance  of  checking  and 
verifying  all  results  cannot  be  too  strongly  emphasized.  The  following 
methods  are  commonly  used  by  bookkeepers  and  accountants: 

(a)  Addition — Add  the  figures  twice  in  reverse  order  while  they  are  before  you. 

(b)  Subtraction — Add  the  remainder  back  to  the  amount  subtracted  before  leav- 

ing it  or  using  the  result. 

Assignment  15,  Page  14 


(c)  Multiplication — Divide  the  product  by  the  multiplier  to  obtain  the  multipli- 

cand, or  by  the  multiplicand  to  obtain  the  multiplier. 

(d)  Division — Multiply  the  quotient  by  the  divisor  and  add  the  remainder  to  this 

product  to  obtain  the  dividend. 

You  can  prevent  numerous  errors  by  exercising  great  care  in  the  fol- 
lowing : 

1.  Recording  Transactions 

(a)  Every  entry  made  in  a  book  of  original  entry  should  be  supported  by  some 
written  evidence,  such  as  an  invoice,  sales  ticket,  etc.  Provide  a  safe  place 
for  these  papers  to  accumulate;  as  each  paper  is  removed  and  recorded, 
cancel  or  otherwise  mark  it.  This  procedure  will  serve  as  a  check  against 
recording  the  same  transaction  twice  or  omitting  a  transaction  entirely. 

(b)  Foot  the  debit  and  credit  columns  (do  not  enter  totals  unless  done  lightly  in 
pencil  on  margins)  in  the  journal  to  test  the  equality  of  debits  and  credits. 

2.  Posting 

(a)  Make  sure  that  your  cross  references  are  made  for  each  item  posted — scan 
the  folio  columns  at  the  time  of  posting. 

(b)  Make  periodic  tests  of  the  postings  to  the  controlling  accounts  by  preparing 
lists  of  the  balance  of  the  accounts  contained  in  the  subsidiary  ledgers.  If 
there  is  a  discrepancy  between  the  general  and  subsidiary  ledgers,  an  error 
has  been  made  in  recording,  posting,  or  extracting  the  balances  of  the 
account.    Thus  it  can  be  corrected  at  once. 

3.  Preparing  a  Post-Closing  Trial  Balance 

(a)  A  trial  balance  after  closing  is  of  great  assistance  in  finding  errors  that 
might  be  made  after  the  regular  trial  balance  is  taken  and  before  the  subse- 
quent period  begins. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

This  assignment  has  emphasized  the  need  for  accuracy  in  recording 
transactions.  As  illustrated  in  the  assignment,  one  error  can  cause  a  lot 
of  trouble  for  the  bookkeeper,  and  may  even  affect  the  progress  of  a 
business. 

Mistakes  can  easily  creep  into  the  records  at  almost  any  point  and 
cause  errors: 

1.  In  addition,  subtraction,  or  multiplication 

2.  In  copying  figures 

3.  In  making  charges  or  credits  to  the  wrong  accounts 

4.  In  omitting  and  duplicating  items 

5.  In  misplacing  debits  and  credits 

In  dealing  with  errors  we  have  made  the  following  practical  sugges- 
tions : 

First — Find  the  Errors 

1.  In  the  trial  balance 

2.  In  the  ledger 

3.  In  the  books  of  original  entry 

4.  As  a  final  resort  abstract  the  ledger 

Assignment  15,  Page  15 


Second — Correct  errors  carefully  and  completely 

1.  Correct  errors  first  at  their  source 

2.  Do  not  erase  or  scratch  over 

3.  Add  all  omitted  items 

Third — Try  in  every  way  to  prevent  errors 

1.  In  addition 

2.  In  transferring  figures 

3.  In  checking  postings 

4.  By  means  of  the  internal  check 

5.  Prove  every  part  of  your  work 

With  these  points  clearly  in  mind  take  up  the  problems.    They  will 
challenge  your  best  effort  at  accurate  and  careful  work. 


Assignment  15,  Page  16 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  15 

The  following  problems  are  typical  of  actual  business  situations.  Pre- 
pare and  send  in  to  the  University  solutions  to  all  the  problems. 

1.  Below  is  a  list  of  errors  frequently  made.  For  each  one,  state 
whether  the  making  of  the  error  would  cause  the  debit  or  credit  side  of 
the  general  ledger  trial  balance  to  be  greater,  and  how  much. 

(a)  Omitted  to  post  from  the  sales  book  the  sale  to  Hayes  and  Ginder  of  $450 
on  account. 

(b)  At  the  beginning  of  tlie  period  the  balance  of  the  capital  account  was  car- 
ried down  as  $6,830.00,  instead  of  $6,380.00,  as  it  should  have  been. 

(c)  Posted  to  the  debit  side  of  Accounts  Receivable  Account,  an  amount  of 
$325.00  paid  to  Arthur  Wright,  a  creditor. 

2.  State  whether  each  of  the  following  errors,  if  left  uncorrected, 
would  cause  the  profit  for  the  period,  as  it  would  appear  on  the  profit  and 
loss  statement,  to  be  greater  or  less  than  it  should  be,  and  by  how  much. 

(a)  Charged  to  Repairs  Account  $8,400,  the  cost  of  installing  a  much-needed 
freight  elevator  in  office  building. 

(b)  In  carrying  forward  from  the  bottom  of  a  ledger  page,  during  the  peinod, 
the  balance  of  $315.00  purchase  discounts  was  carried  to  the  wrong  side  of 
the  account  at  the  top  of  the  new  page. 

(c)  Posted  $15.00  to  the  debit  side  of  furniture  and  fixtures  account  instead  of 
$1,500.00,  the  amount  that  should  have  been  posted. 

3.  John  Lucky,  the  proprietor  of  a  grocery  store,  withdrew  $275.00 
cash  for  personal  use  in  paying  household  expenses.  On  the  same  date  he 
invested  an  auto  truck,  valued  at  $700.00,  in  the  business.  The  truck  had 
recently  been  given  to  Mr.  Lucky  by  his  father.  In  recording  these  facts, 
the  bookkeeper  deducted  the  cash  withdrawal  from  the  value  of  the  truck 
and  made  the  following  entry: 

Auto  Truck  $425.00 

John  Lucky,  Capital $425.00 

(a)  Did  he  record  the  transactions  properly? 

(b)  If  not,  would  the  equilibrium  of  the  trial  balance  be  affected? 

(c)  Again  if  not,  how  would  you  proceed  to  correct  the  error? 

4.  The  books  of  original  entry  and  general  ledger  accounts  of  J.  F. 
Dwyer,  wholesale  dry  goods  dealer,  are  shown  on  the  following  pages  as 
they  existed  on  June  15,  1921. 

(a)  From  the  accounts  as  they  now  stand  take  a  trial  balance. 

(b)  Should  the  trial  balance  indicate  that  some  errors  have  been  made,  locate 
them  and  state  how  you  would  make  the  correction  in  each  case. 

(c)  Reproduce  the  trial  balance  with  all  apparent  errors  corrected. 


Assignment  15,  Page  17 


JOURNAL 


Date 


1921 
June  1 


10 


12 


13 


L.F. 


Explanation 


Cash _.  . 

Buildings  ".  . 

Furniture  and  Fixtures 

Merchandise  Inventory  

Land 

J.  F.  Dwyer,  capital 

Assets  and  Liabilities  at  commencement 
of  business 

A. B.C.  &  Co.  Accounts  Payable  

Notes  Payable  ...... 

Gave  our  60  day  non  interest  bearing  note  to 
A. B.C.  &  Co. 

Sales  Returned ,. 

John  Light 

J.  Light  returned  $50  worth  of  goods 

Notes  Receivable 

R.  P.  Penn  Accounts  Receivable 

Received  30  day  non-interest  bearing  note 
from  R.  P.  Penn 


Dr. 


,000  00 
,35000 
,50000 
,67500 
.800100 


2,000 


50 


200 


00 


00 


00 


Cr. 


$23,325 


2,000 


50 


200 


00 


00 


00 


00 


CASH  BOOK— Receipts 


Date 


L.F. 


Explanation 


Gen. 

Ledger 
Credits 


Customers' 
Ledger 
Credits 


Total 


1921 

June  1 

8 

9 

9 

10 

12 

13 

14 

15 


15 


J.  F.   Dwyer  Investment  

R.  S.  Sloane  on  a/c 

John  Light,  on  a/c  ..:.... 

Sales  for  Cash  

R.  P.  Penn,  on  a/c  

Sales  for  Cash  

Notes. Rec.   Dis.    (Red'd  full  val.) 

Brown  Bros 

Sales  for  Cash  

General  Ledger  

Customers'   ledger  Cr 

Cash  Dr 

Balance 


$5,000 


300 

650 
200 

175 


00 


$     11000 
50000 

25  00 


75  00 


$  6,325 


00 


Sl.eiOjOO 


$7,935 
$4,326 


Assignment  15,  Page  18 


CASH  BOOK— Disbursements  f ; 


Date 


L.F. 


Explanation 


Gen. 

Creditors' 

Ledger 

Ledger 

Total 

Dr. 

Dr. 

$     100 

00 

325 

50 

150 

00 

$     375 

00 

52 

50 

300 

10 

1,700 

00 

450 

00 

155 

00 

$2,483 

00 

$1,125 

10 

S3, 608 
4,326 

10 
90 

$7,935 

00 

1921 

June  1 

2 

6 

7 

10 

14 

15 

15 

15 

15 


Expense,  Insurance  .  . 
Expense,  advertising  . 
Purchases,  cash.  .  .  . 
A.  B.  C.  &  Co.,  on  a/c 
Expense,  office  desk  . 
L.  N.  Murphy,  on  a/c  . 
Purchases,  cash.  .  .  . 
James  King,  on  a/c  .  . 
Expense,  wages  .  .  .  . 

General  Ledger  .  .  .  . 
Creditors'  ledger  Dr. 

Cash  Cr 

Balance 


SALES  BOOK 


Date 

L.F. 

Explanation 

Terms 

Amount 

1921 
June  2 
3 
5 
9 
9 

10 
12 
14 

15 

John  Light. 
R.  P.  Penn. 
R.  S.  Sloane 
Cash.    .    .    . 

$     750 
225 
110 
300 
135 
75 
490 
150 

00 
00 
00 
00 
00 
00 
00 
00 

Amos  Walls 

Brown  Bros. 
A.   B.  Kline 
Wilson  &  Son 

Dr.  Accounts 

Receivable  Cr.   Sales   

$2,285 

00 

'■ 

PURCHASE  BOOK 


Date 


1921 

June  4 

9 

12 

13 

15 


L.F. 


Explanation 


A.   B.   C.   &  Co..    . 
James  King.    .    .    . 
A.  H.  Stoner  &  Son 
L.  N.  Murphy.    .    . 
H.  K.  Howard  Co.. 


Terms 


Amount 


$2,375 

450 

900 

1,185 

175 


$4,985 


10 


Assignment  15,  Page  19 


GENERAL  LEDGER  ACCOUNTS 

J.  F.  Dwyer,  Capital 


1921 

1921 

June 

1 

Investment 

$23,325 

00 

Investment 

5,000 

00 

CASH 


1921 

June    15    Balance 


$4,326  90 


1921 


SALES 


SALES  RETURNED 


EXPENSE 


PURCHASES 

1921 
June 

6 

Cash 

$  150 

00 

1921 

. 

15 

Cash 

1,700 

00 

15 

Total  on  a/c 

4,958 

10 

1921 

1921 
June 

9 

Cash 

$  300 

00 
00 

12 

Cash 

650 

15 

Cash 

175 

00 
00 

15 

Total  on  a/c 

$2,285 

1921 

; 

1921 

June 

12 

John  Light 

$  50 

00 

1921 

June 

1 

Insurance 

$  100 

00 

1921 

- 

2 

Advertising 

325 

00 

10 

Office  desk 

52 

50 

15 

Wages 

155 

00 

— 

Assignment  15,  Page  20 


ACCOUNTS  RECEIVABLE 


1921 

June 

12 

Sales  returned  (John  Light) 

$      50 

00 

1921 

June 

13 

$200 

00 

Note   (R.P.Penn) 

15 

Total  sales  a/c 

2,285 

00 

NOTES  RECEIVABLE 


1921 

June 

13 

E.P.Penn 

$200 

00 

1921 

NOTES  RECEIVABLE 

(Discounted) 

1921 

1921 

June 

13 

R.  P.   Penn  note 
sold  to  bank 

S200 

00 

NOTES  PAYABLE 


1921 

1921 
June 

10 

A.   B.   C.   &  Co. 

$2,000 

00 

I 

ACCOUNTS  PAYABLE 


1921 

June 

7 

A.  B.   C.  &  Co.   cash 

$     375 

00 

1921 

June 

15 

Total  purchase  on  a/c 

S4,985 

10 

10 

Our  note  to  A.   B.   C.   &  Co. 

2,000 

00 

14 

L.   N.  Murphy ,  cash 

300 

10 

15 

James  King,  cash 

450 

00 

BUILDINGS 


1921 
June 

1 
1    Investment 

S7,350 

00 

1921 



— 

LAND 


1921 
June 

1 

Investment 

£1,800  00 

1921 

Assignment  15,  Page  21 


MERCHANDISE  INVENTORY 


1921 
June 

1 

Investment 

$17,675 

00 

1921 

FURNITURE  &  FIXTURES 


1921 
June 

1 

Investment 

$1,800 

00 

1921 

Note:  It  is  assumed  that  the  amount  for  each  asset,  purchase,  sale,  and  expense, 
as  shown  in  the  various  books  of  original  entry,  is  correct. 


Assignment  15,  Page  22 


Higher  Accountancy 

Ol  ID 

PRINCIPLES 
PRACTICE  ««/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assig,nnient  16 

PERIODIC  ADJUSTMENTS  FOR  ACCRUED 
AND  DEFERRED  ITEMS 


THE  unusual  development  of  World  Commerce,  car- 
rying with  it  the  necessity  for  great  financial  insti- 
tutions, industrial  organizations,  and  business  corpora- 
tions and  partnerships,  has  created  an  imperative  demand 
for  higher  accounting  efficiency  which  it  is  difficult  to  meet. 
There  is  a  vast  difference  between  the  bookkeeper  who 
mechanically  records  the  work  assigned  to  him  and  the 
trained  accountant  who  is  able  to  treat  his  work  intel- 
ligently. One  remains  a  time  server — the  other  becomes 
an  executive. 

HAYES  Flowers,  C.  P.  A. 

Formerly  State  Auditor  and  Member  of  the 
Tennessee  State  Board  of  Certified  Public  Accountants. 

LaSalle  Extension  University 

Chicago 


NHA-16 
11-302 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.le  Extension  University 


PERIODIC  ADJUSTMENTS 

FOR  ACCRUED  AND  DEFERRED  ITEMS 

Many  bookkeepers  pride  themselves  on  their  abihty  to  keep  their  rec- 
ords free  from  mechanical  errors,  such  as  those  discussed  in  the  preceding 
assignment.  That  in  itself  is  an  admirable  accomphshment.  But  it  doesn't 
go  far  enough.  Along  with  this  accuracy  should  go  a  thoro  knowledge  of 
fundamental  accounting  principles. 

The  bookkeeper  of  a  certain  auto  supply  house  recently  went  thru  a 
rather  humiliating  experience,  which  he  might  have  avoided  if  he  had 
applied  the  accounting  principles  which  are  set  forth  in  this  assignment. 

Briefly  stated,  this  is  what  happened : 

At  the  end  of  the  year  the  bookkeeper  closed  the  books  and  set  up  the  balance 
sheet  and  profit  and  loss  statement  showing  a  net  profit  of  $12,372.65.  He  then  sub- 
mitted the  two  statements  to  each  of  the  officers  of  the  company. 

When  the  treasurer  received  the  statements,  he  compared  them  with  the  state- 
ments of  the  preceding  year  and  found  that  the  net  profit  had  decreased  over  $2,000.00. 

He  at  once  suspected  that  something  was  wrong.  Being  a  man  who  had  had  con- 
siderable experience  in  accounting,  he  made  an  independent  check  on  the  books. 

This  is  what  he  found.  During  the  first  month  of  the  year  $900.00  was  paid  out 
for  insurance,  to  cover  a  period  of  three  years,  and  this  entire  premium  had  been 
charged  into  the  Expense  Account  of  the  current  year,  just  $600.00  too  much.  He  also 
found  that  $1,500.00  was  spent  for  office  supplies,  $1,200.00  of  which  was  still  on  the 
shelves  and  represented  an  asset,  rather  than  an  expense,  for  the  period.  The  result 
was  that  the  net  profit  shown  on  the  profit  and  loss  statement  was  $1,800.00  too  small, 
and  the  balance  sheet  did  not  show  among  the  assets  unexpired  insurance  and  office 
supplies.  ! 

Tlie  treasurer  also  looked  over  the  notes  receivable  register  for  notes  due  from 
customers,  most  of  which  were  interest  bearing.  He  figured  the  interest  on  these  notes 
from  the  date  of  issue,  or  from  the  date  of  the  last  interest  payment,  up  to  the  date 
of  the  financial  statements.  This  amounted  to  $350.00,  which  was  really  income  for  the 
current  year,  even  tho  it  would  not  be  due  until  some  time  later.  This  should  have  been 
included  among  the  other  income  items. 

With  these  items  before  him,  the  treasurer  called  in  the  bookkeeper  and  asked  for 
an  explanation.  The  bookkeeper  maintained  that  his  books  contained  a  recordfor  every 
transaction  of  the  period,  that  his  books  were  in  balance,  and  for  this  reason  his  balance 
sheet  and  profit  and  loss  statement  must  be  correct. 

The  treasurer  not  only  pointed  out  the  bookkeeper's  errors,  but  he  also  brought  out 
the  fundamental  accounting  principles  that  he  failed  to  apply:  "Your  statements  are 
false  and  misleading  because  they  are  incomplete.  In  fact  they  are  useless  to  us  who 
manage  the  affairs  of  the  company,  for  two  reasons: 

"1.  Your  balance  sheet  does  not  show  all  the  assets. 
2.  Your  profit  and  loss  statement  shows  $1,800.00  too  much  expense 
and  fails  to  show  $350.00  interest  income. 

"How  can  I  use  statements  that  are  as  incomplete  and  false  as  these  are?  You 
should  have  adjusted  your  ledger  accounts,  and  then  your  statements  would  have  been 
correct." 


The  treasurer  had  found  the  real  trouble.  It  is  typical  of  what  happens 
to  many  bookkeepers  who  pride  themselves  chiefly  on  the  mechanical  ac- 
curacy of  their  records,  but  who  fail  to  make  an  intelligent  analysis  and 
interpretation  of  the  records. 

The  general  ledger  is,  to  be  sure,  a  continuous  record  of  all  transactions, 
sales,  purchases,  expenses,  incomes,  as  these  transactions  take  place.  This 
the  bookkeeper  mentioned  above  had  accomplished.  His  ledger  was  cor- 
rect. But  this  is  not  enough.  Business  is  subject  to  continual  changes  in 
values,  which  it  is  not  practical  to  record  at  the  time,  because  this  would 
involve  a  tremendous  amount  of  bookkeeping.  For  example,  interest  earned 
on  notes  receivable  is  accumulating  every  day  and  every  hour.  The  same 
is  true  of  interest  payable.  To  record  this  accumulation  daily  would  require 
too  much  time. 

Accountants,  therefore,  adjust  the  ledger  periodically  for  all  such 
items.  To  omit  such  items  would  result  in  false  and  misleading  state- 
ments. This  can  be  illustrated  by  another  situation  taken  from  business. 
The  trial  balance  shown  in  Figure  1  shows  the  ledger  of  A.  J.  Swift,  as  it 
stood  on  December  31,  1921: 


A.  J.  Swift 

TRIAL  BALANCE,  DECEMBER  31,  1921 

Equipment $   700.00 

Accounts  Payable  $   780.00 

Accounts  Receivable 3,640.00 

Capital 5,633.00 

Cash 1,255.00 

Customers'  Discounts  146.00 

Furniture  and  Fixtures  500.00 

Income  from  Rent 195.00 

Insurance  Expense 420.00 

Interest  Expense  90.00 

Merchandise  Inventory,  July  1,  1921 1,670.00 

Notes  Payable 2,000.00 

Notes  Receivable  1,600.00 

Office  Expense  645.00 

*Purchases 6,810.00 

Purchase  Discounts  114.00 

Rent 1,500.00 

Sales 12,460.00 

Selling  Expense 720.00 

Stationery  and  Office  Supplies  456.00 

Wages 1,030.00 


$21,182.00     $21,182.00 
♦Inventory,  December  31,  1921,  $1,960.00. 


The  Unadjusted  Trial  Balance 

Figure  1.    This  trial  balance  shows  the  balances  in  the  ledger  before  closing,  and  before 

making  any  adjustments  for  accrued  and  deferred  items.     The  statements  in  Fig:ure  2 

are  set  up  from  this  trial  balance. 

From  this  trial  balance  we  will  first  make  up  a  profit  and  loss  state- 
ment and  a  balance  sheet,  using  the  amounts  just  as  they  are  shown 

Assignment  16,  Page  2 


(See  Figure  2).  In  doing  this,  we  need  to  make  an  adjustment  for  the 
current  inventory  of  merchandise  in  order  to  determine  the  cost  of  the 
goods  sold.  This  adjustment  for  the  two  inventory  figures  and  the  pur- 
chases for  the  period  was  fully  discussed  in  Assignment  4. 


Sales 

A.  J.  Swift 
PROFIT  AND  LOSS  STATEMENT 
FOR  YEAR  ENDING  DECEMBER  31,  1921 

S 

1,670.00 
6,810.00 

$12,460.00 
6,520.00 

Merchandise  Inventory. 
Purchases 

Less  Current  Inventory 

Cost  of  Goods  Sold 

Gross  Profit  

Expenses 
Insurance 

•  • 

•  • 

$ 

8,480.00 
1,960.00 

S 

420.00 
645.00 

1,500.00 
720.00 
456.00 

1,030.00 

S 

5,940.00 
4,771.00 

Office  Expense  .  .  .  . 

Rent 

Selling 

Stationery  and  Office 
Wages 

Supplies 

Operating  Profit 
Sundry  Income 
Income  from  Eent  .  .  . 

$ 

195.00 
114.00 

s 

1,169.00 
309.00 

Purchase  Discount.  .  . 

Sundry  Expense 
Customer's  Discount. 

$ 

146.00 
90.00 

s 

1,478.00 
236.00 

Interest  

Net  Profit 

$ 

1,242.00 

A.  J.  Swift 
BAUNCE  SHEET,  DECEMBER  31,  1921 


ASSETS 
Current  Assets: 

Cash $1,255.00 

Accounts  Receivable  3,640.00 
Notes  Receivable  .  1,600.00 
Current  Inventory.  1,960.00 


Total  Current  Assets  . 

Fixed  Assets: 

Furniture  &  Fixtures 
Equipment 


500.00 
700.00 


Total  Fixed  Assets. 


!,455.00 


1,200.00 


$9,655.00 


LIABILITIES  AND  CAPITAL 
Current  Liabilities: 
Notes  Payable.  .  .  $2,000.00 
Accounts  Payable  .    780.00 


Total  Current  Liabilities.  .  .  $2,780.00 

Net  Worth: 

Capital,  July  1.  .  $5,633.00 
Net  Profit  ....  1,242.00 


6,875.00 


$9,655.00 


Figure  2.     Financial  statements  made  up  at  the  end  of  the  accounting  period  without 

giving  effect  to  required  adjusting  entries.     The  statements  are  not  complete,  because 

they  do  not  reflect  the  actual  condition  of  the  business.    Follow  the  discussion,  and  you 

will  see  just  in  what  respect  they  are  defective. 

Assignment  16,  Page  3 


Since,  however,  it  is  the  purpose  of  accounting  to  give  a  correct  report 
of  the  final  worth  of  a  going  business,  it  is  necessary  before  using  this  trial 
balance  for  statement  purposes  to  examine  the  accounts  and  see  if  all  facts 
are  included.  If  that  is  not  the  case,  the  reports  as  shown  in  Figure  2  will 
be  inaccurate  and  misleading. 

ACCRUED  ITEMS 

A  careful  examination  of  certain  accounts  listed  in  the  preceding  trial 
balance  will  bring  out  facts,  which  have  not  yet  been  recorded,  but  which 
have  a  direct  bearing  on  the  condition  of  the  business.  To  begin  with,  we 
find  that  certain  items  have  accrued,  that  is,  have  been  growing  larger, 
which  ordinarily  would  not  be  entered  until  some  future  date.  For  ex- 
ample : 

1.  Accrued  Interest  Receivable 

2.  Accrued  Wages  Payable 

3.  Accrued  Interest  Payable 

Now  that  we  are  closing  the  books,  and  setting  up  the  statements,  we 
must  bring  these  and  any  similar  accrued  items  into  the  ledger,  in  order 
that  they  will  appear  in  the  statements,  and  thus  the  statements  will  show 
the  actual  condition  of  the  business. 

Accrued  Interest  Receivable.  First  of  all  take  the  matter  of  interest 
earned  but  not  yet  collected.  We  will  naturally  examine  the  Notes  Re- 
ceivable Account. 

Notes  Receivable 


Nov. 
Dec. 


31 


J.  R.  Brown 
Chas.  Andrews 

(Balance) 


$  600 
1,000 


$1,600 


00 


We  find  that  the  notes  receivable,  $1,600,  as  shown  in  the  ledger  ac- 
count, bear  6%  interest;  therefore,  when  the  notes  come  due  the  business 
expects  to  receive  interest  in  addition  to  the  payment  of  the  principal. 
This  interest,  however,  is  earned  during  the  time  the  notes  are  held,  not 
when  it  is  collected.  Therefore,  we  should  set  up  the  amount  earned  to 
date,  December  31,  1921,  by  the  following  entry — 

December  31,  Interest  Receivable  (accrued  asset) $11.00 

Interest  Earned  (income) $11.00 

Accrued  Wages  Payable.  A  similar  adjustment  must  also  be  made 
for  wages  payable,  which  is  an  expense  for  1921  and  a  liability  at  the  end 
of  the  year.    First  we  examine  the  Wages  Account  in  the  ledger. 

Wages 


Nov. 

30 

(Balance) 

$  938 

00 

Dec. 

6 

20 

00 

II 
II 

13 
20 

24 
22 

00 
00 

II 

27 

Balance 

26 

00 

$1,030 

00 

Assignment  16,  Pafi:e  4 


The  account  shows  that  wages  have  been  paid  each  week  during  the 
month,  but  the  last  four  days  of  the  month  must  also  be  included,  wages 
having  accrued  for  December  27  to  December  31.  The  amount  of  wages 
unpaid  is  $17.00,  and  the  following  entry  will  adjust  this  account  and  com- 
plete the  record: 

December  31,  Wages  (expenses) $17.00 

Wages  Payable  (accrued  liability) $17.00 

Accrued  Interest  Payable.  Likewise,  an  examination  of  the  Notes  Pay- 
able Account  shows  that  $20.00  interest  has  accumulated,  up  to  December 
31,  which  should  be  brought  into  the  ledger  as  an  expense  for  the  period. 

Notes  Pay.\ble 


Hov. 

I 

Balance 

$2,000 

00 

In  this  case,  the  obligation  for  borrowed  money  is  properly  recorded, 
but  the  interest  which  has  accumulated  from  November  1  to  December  31 
is  not  accounted  for.  The  note  bears  Q%  interest,  payable  when  the  note 
matures.  To  show  the  amount  of  accrued  liability  for  interest  due  to  date, 
an  adjusting  entry  must  be  set  up. 

December  31,  Interest  (expense) _ „ $20.00 

Interest  Payable  (accrued  liability) „ _.$20.00 

In  each  of  these  cases,  the  adjusting  entry  sets  up  an  account  for  the 
accrued  asset  or  the  accrued  liability,  and  thus  makes  possible  a  statement 
of  the  actual  financial  condition  at  the  closing  date.  It  also  shows  that  the 
income  is  earned  in  the  period  when  the  service  is  rendered,  not  when  the 
cash  is  received.  Similarly,  the  expense  is  charged  into  the  period  which 
receives  the  benefit,  not  when  the  payment  is  made.  The  cash  receipts 
and  payments  simply  represent  the  final  settlement  of  these  transactions. 

DEFERRED  ITEMS 

There  are  other  items  of  exactly  the  opposite  nature  that  also  require 
adjustment.  For  example,  an  expense  or  income  may  have  already  been 
recorded,  but  the  service  paid  for  or  collected  for,  as  the  case  may  be,  is 
not  all  applicable  to  the  present  period.  Certain  expenses  and  incomes  are 
deferred  items,  that  is,  carried  over  into  the  subsequent  period.  In  such 
cases  adjustments  must  be  made  in  order  t?iat  the  portion  which  should 
be  applied  to  subsequent  periods  will  be  deferred. 

Prepaid  Rent.  Here  is  the  Rent  Account,  as  it  appeared  on  the  ledger, 
December  31,  1921. 

Rent  Expense 


Feb. 

1 

Cash 

$  375 

00 

May 

1 

ti 

375 

00 

Aug. 

1 

II 

375 

00 

Nov. 

1 

II 

Balance 

375 

00 

$1,500 

00 

AssigTunent  16,  Page  5 


Looking  into  the  facts  of  the  Rent  Account,  we  find  that  rent,  as  speci- 
fied in  the  lease,  is  paid  quarterly,  in  advance.  The  last  entry  of  $375.00, 
therefore,  covers  two  months  of  the  present  period,  November  and  De- 
cember, and  one  month  of  the  next,  namely,  January.  To  defer  the  rent 
paid  for  January,  the  following  adjusting  entry  is  required: 

December  31,  Prepaid  Rent   (deferred  asset) $125.00 

Rent  (expense)  _ _ $125.00 

Office  Supplies.  The  following  account  also  appears  on  the  ledger  of 
A.  J.  Swift. 

Stationery  and  Office  Supplies 


Dec. 

31 

Balance 

$456  00 

At  the  close  of  the  period,  an  inventory  of  stationery,  postage,  etc., 
shows  that  $40.00  worth  is  still  on  hand.  This  represents  an  asset,  that 
is,  it  has  a  value  to  a  going  business  which  will  probably  be  used  up  dur- 
ing the  following  period.  This  amount  of  the  charge  to  expense,  $40.00,  is 
therefore  carried  forward  to  the  next  year  by  the  following  entry. 

Inventory  of  Office  Supplies  (Deferred  Asset) $40.00 

Stationery  and  Office  Supplies  (Expense) $40.00» 

Prepaid  Insurance.  We  next  turn  to  the  Insurance  Account,  since  part 
of  the  premiums  paid  will  provide  insurance  protection  for  part  of  the 
following  year. 


Insukanct 

Expense 

Sept. 
It 

Dec. 

1 
30 

31 

(Balance) 
Cash 

Balance 

$300 
120 

00 
00 

$  420 

00 

We  find  in  this  case  that  the  insurance  paid  for  up  to  September  1 
has  all  expired.  The  premiums  paid  on  September  30  were  for  a  year  in 
advance.  It  would  be  improper,  therefore,  to  consider  all  of  this  expense 
as  apphcable  to  the  present  period,  because  9/12  of  $120,  or  $90,  covers 
the  following  period.     The  following  entry  makes  this  adjustment. 


December  31,  Prepaid  Insurance  (Deferred). 
Insurance  (Expense)  


.$90.00 


.$90.00 

Deferred  Income  from  Rent.  The  A.  J.  Swift  Company  subleases  part 
of  its  building,  and  receives  rent  in  advance,  as  shown  in  the  following 
account. 


Income 

FROM  Rent 

Oct. 

1 
31 

(Balance) 
Cash 

Balance 

$150 
45 

00 
00 

$  195 

00 

Assignment  16,  Page  6 


This  account  shows  that  a  part  of  the  store  is  rented  for  $45.00  every 
three  months,  payable  in  advance.  The  payment  of  October  31  covers 
November,  December,  and  the  followmg  January.  Therefore,  $15.00  of 
this  income  rent  for  January  has  not  been  earned  at  the  close  of  the  period, 
altho  it  has  been  received.  This  amount  is  a  deferred  liability  or  a  de- 
ferred credit  until  it  has  been  earned.  It  will  appear  on  the  liability  side 
of  the  balance  sheet  under  the  caption  of  Deferred  Credits.  It  is  brought 
into  the  records  of  the  next  period  by  the  following  entry: 

December  31,  Income  from  Rent  (Income) _ $15.00 

Deferred  Income  (Liability) _ $15.00 

TWO  METHODS  OF  HANDLING  DEFERRED  ITEMS 

From  the  above  explanation,  you  will  note  that  in  the  case  of  deferred 
items,  the  record  of  the  transaction  is  made  at  the  time  the  cash  is  paid 
or  received.  Generally  speaking,  there  are  two  methods  of  handling  these 
transactions.  One  of  these  we  have  given.  For  example,  when  an  insur- 
ance premium  is  paid  it  may  be  charged  directly  to  expense,  as  in  the  case 
given  above.  This  method  makes  necessary  the  adjusting  entry  as  al- 
ready illustrated,  and  in  order  to  get  the  amount  deferred  back  into  ex- 
penses for  the  next  period,  a  reversing  entry  is  made  after  the  books 
have  been  closed. 

A  second  and  better  method  is  to  charge  the  amount,  when  paid,  di- 
rectly to  the  Deferred-Asset  Account,  since  cash  has  simply  been  con- 
verted into  a  value  of  another  kind.  Then  as  this  value  decreases,  credit 
this  Deferred-Asset  Account  and  debit  Expense  at  the  end  of  each  period 
with  the  value  which  has  expired  or  is  used  up.  In  this  way  the  deferred 
amount  remains  in  the  Asset  Account. 

Take,  for  example,  the  adjustment  for  office  supplies  which  was  given 
on  page  6.  When  the  $456.00  worth  of  supplies  are  bought,  say  on  June 
30,  we  will  charge  this  amount  directly  to  the  Deferred-Asset  Account,  Of- 
fice Supplies,  rather  than  to  an  Expense  Account,  thus: 

Office  Supplies 


June 

30 

Purchase  of 
Office  Supplies 

$456 

00 

Then  on  December  31,  we  will  credit  this  Asset  Account  with  the  actu- 
ally used-up  amount,  $416.00,  and  debit  Expense  Account  thus : 

Office  Supplies 


June 
Jan. 

30 
1 

Purchase  of 
Office  Supplies 

Balance 

$456 
$456 

00 
00 
00 

Dec. 

31 

To  Expense 
Balance 

Unused  Supplies 

$416 
40 

00 
00 

00 

$456 

$  40 

Assignment  16,  Page  7 


Office  Expense 


Dec. 

31 

Office  Supplies 

$416 

00 

To  be  closed  to  Profit 
and  Loss  Account 

This  second  method  brings  out  clearly  the  nature  of  deferred  items. 
They  are  mixed  accounts,  being  partly  real  and  partly  nominal.  The  real 
part  is  the  deferred  charge  or  the  deferred  income,  which  becomes  an 
asset  or  liability,  as  the  case  may  be,  on  the  balance  sheet  for  the  purpose 
of  proper  accounting  control.  The  nominal  part  is  the  expense  or  the  in- 
come earned  for  the  closing  period,  and  therefore  will  be  included  in  the 
profit  and  loss  statement.  It  is  for  the  purpose  of  separating  the  real  and 
nominal  elements  that  adjusting  entries  are  required. 

WORKING  SHEET  AN  AID  IN  MAKING  ADJUSTMENTS 

In  order  to  provide  an  accurate  and  convenient  method  of  making  all 
these  adjustments  mentioned,  accountants  prepare  a  tabulation  or  state- 
ment, called  the  "working  sheet."    See  Figure  3. 

In  preparing  such  a  working  sheet,  begin  by  listing  in  the  first  two 
columns  the  trial  balance  before  closing  and  before  adjustments  are  made. 
Then  enter  the  adjustments,  debits,  and  credits  in  the  two  columns  im- 
mediately to  the  right  of  the  trial  balance.  Add  up  the  debit  and  credit 
columns  for  adjustments.  The  total  debits  and  total  credits  should  be 
equal,  thus  proving  that  equal  debits  and  credits  have  been  made  in  the 
adjusting  entries. 

To  the  right  of  the  adjustment  columns,  set  up  two  more  columns  for 
the  adjusted  trial  balance.  By  the  adjusted  trial  balance  is  meant  the 
same  trial  balance  of  the  first  two  columns,  with  the  amounts  changed 
wherever  they  are  affected  by  the  adjustments.  Then  add  these  two 
columns  to  prove  that  no  errors  have  been  made  in  extending  and  chang- 
ing the  amounts. 

Next  to  the  adjusted  trial  balance  set  up  two  more  columns,  in  which 
you  will  extend  all  amounts  for  the  profit  and  loss  accounts  and  the  inven- 
tory adjustments.  Add  the  columns  and  you  will  find  that  the  debit  and 
credit  sides  are  not  equal.  If  you  have  a  credit  balance,  add  an  amount  to 
the  debit  side  large  enough  to  make  the  two  sides  balance.  This  will 
represent  the  net  profit.  If  the  debit  side  is  larger  than  the  credit  side, 
add  the  difference  to  the  credit  side,  as  net  loss. 

To  complete  the  working  sheet,  set  up  two  columns  next  to  the  profit 
and  loss  columns.  In  these  columns  list  the  assets  as  debits  and  the  liabil- 
ities and  capital  as  credits.  Extend  the  net  profit  or  net  loss  to  make  the 
two  columns  balance. 

The  working  sheet  does  not  take  the  place  of  entries  on  the  books.  Its 
purpose  is  simply  to  lay  out  the  work  systematically  and  check  results  in 
connection  with  making  the  adjusting  entries. 

Such  a  sheet  provides  a  means  of  assembling  in  one  place  all  the  figures 
with  which  you  are  working.    If,  for  example,  you  examine  the  accounts 


Assignment  16,  Page  8 


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of  a  trial  balance  preparatory  to  making  adjustments,  you  will  find  this 
or  that  item  that  needs  adjustment.  Instead  of  noting  down  these  items 
on  scattered  sheets  or  scraps  of  paper,  you  can  use  the  working  sheet  to 
advantage,  by  listing  all  the  adjustments  systematically.  In  this  way  you 
can  maintain  a  balance  while  you  make  adjustments. 

Then,  by  extending  the  amounts  in  the  proper  columns,  you  separate 
the  profit  and  loss  statement  items  from  the  balance  sheet  items.  This 
segregation  of  items  on  the  working  sheet  is  of  considerable  help  when  you 
prepare  the  financial  statements. 

Practicing  accountants  also  find  the  working  sheet  a  great  help  in  mak- 
ing adjustments  at  the  time  of  auditing  a  set  of  books. 

Adjusting  Entries  Journalized.  After  the  adjusted  trial  balance  has 
been  proved,  as  shown  by  the  working  sheet,  the  adjusting  entries  should 
be  recorded  in  the  general  journal,  as  shown  in  Figure  4.  The  items  are 
then  posted  to  the  general  ledger. 

A  clear  distinction  must  be  made  between  adjusting  entries  and  clos- 
ing entries.  Closing  entries  are  made  after  all  necessary  adjusting  entries 
have  been  made.  Each  account  after  adjustment  is  a  true  real  account 
or  a  true  nominal  account.  When  this  has  been  accomplished,  the  accounts 
should  be  closed  by  journal  entry,  as  explained  in  Assignment  6. 

ADJUSTING  JOURNAL  ENTRIES 


DATE 

FOL. 

EXPLANATION 

DEBITS 

CREDITS 

Dec. 

31 

Accrued  Interest  Receivable 

Interest  Earned 
For  interest  accrued  and  earned,  but  not  yet  received. 

$  11 

00 

$  11 

00 

Dec. 

31 

Wages 

Accrued  Wages  Payable 
For  wages  accrued  but  not  yet  paid. 

17 

00 

17 

00 

Dec. 

31 

Interest  Expense 

Accrued  Interest  Payable 
For  interest  accrued  but  not  yet  paid. 

20 

00 

20 

00 

Dec. 

31 

Prepaid  Rent 

Rent 
To  defer  1  month's  rent  to  next  period. 

125 

00 

125 

00 

Dec. 

31 

Inventory  of  Office  Supplies 

Office  Supplies 
To  defer  part  of  Office  Supplies  to  next  period. 

40 

00 

40 

00 

Dec. 

31 

Income  from  Rent 

Deferred  Credit 
To  record  the  liability  for  rental  service. 

15 

00 

15 

00 

Dec. 

31 

Prepaid  Insurance 

Insurance  Expense 
To  record  the  unexpired  insurance. 

90 

00 

90 

00 

Adjusting  Joubnal  Entries 

Figure  4.    These  are  the  same  journal  entries  which  we  made  in  the  examination  of  the 
accounts.    The  only  difference  is  that  here  we  have  set  them  up  together  in  the  journal 

just  as  would  be  done  in  practice. 


Assignment  16,  Page  10 


Profit  and  Loss  Statement  After  Adjustment.  The  following  state- 
ment is  a  proper  arrangement  of  the  profit  and  loss  items  in  report  form. 
As  you  note,  it  contains  the  same  items  as  those  in  the  Profit  and  Loss 
columns  of  the  working  sheet,  only  in  a  different  arrangement.  This  profit 
and  loss  statement  shows  a  net  profit  of  $1,456.00  in  comparison  with 
$1,242.00,  which  was  the  amount  shown  before  making  the  adjustments. 
This  error  of  $214.00  illustrates  clearly  the  necessity  of  such  corrections 
and  adjustments  before  preparing  financial  statements. 


A.  J.  Swift 

PROFIT  AND  LOSS  STATEMENT 

For  the  Year  Ended  December  31,  1921 

Sales $12,460.00 

Merchandise  Inventory  $1,670.00 

Purchases  6,810.00 

$8,480.00 
Less  Current  Inventory  1,960.00 

Cost  of  Goods  Sold 6,520.00 


Gross  Profit $5,940.00 

EXPENSES 

Insurance  $  330.00 

Office  Expense 645.00 

Rent 1,375.00 

Selling  720.00 

Stationery  and  Office  Supplies 416.00 

Wages  1,047.00   4,533.00 


Operating  Profit $1,407.00 

SUNDRY  INCOME 

Interest  Earned $   11.00 

Rent 180.00 

Purchase  Discounts 114.00     305.00 


$1,712.00 


SUNDRY  EXPENSE 

Customer's  Discount  $  146.00 

Interest  Cost  110.00    256.000 


Net  Profit $1,456.00 


Figure  5.    The  Profit  and  Loss  Statement,  made  up  from  the  adjusted  trial  balance. 

Balance  Sheet  After  Adjustments.  You  will  also  notice  from  the  com- 
parative balance  sheets  given  below  the  effect  of  the  adjustments  on  the 
financial  condition.  The  current  assets  were  understated  by  $11.00,  and 
deferred  charges  of  $255.00  were  omitted.  On  the  other  hand,  liabilities 
to  the  extent  of  $52.00  were  not  shown.  The  following  balance  sheet  in- 
cludes all  these  items. 

Assignment  16,  Page  11 


A.  J.  Swift  Company 

COMPARATIVE  BALANCE  SHEET 

December  31,  1921 

Before  Making  After  Making 

Assets                       Adjustments  Adjustments 
Current  Assets: 

Cash         $1,255.00  $1,255.00 

Accounts  Receivable 3,640.00  3,640.00 

Notes  Receivable  1,600.00  1,600.00 

Accrued  Interest  Receivable 11.00 

Current  Inventory 1,960.00  1,960.00 

Total  Current  Assets   $8,455.00  $8,466.00 

Fixed  Assets: 

Equipment $700.00 

Furniture  and  Fixtures   500.00 

Total  Fixed  Assets   1,200.00 

Deferred  Charges: 

Prepaid  Rent  

Stationery  and  Supplies 

Prepaid  Insurance 

Total  Deferred  Charges   

Total  Assets  $9,655.00 

Liabilities 
Current  Liabilities: 

Notes  Payable $2,000.00. 

Accounts  Payable   780.00 

Wages  Payable  Accrued 

Interest  Payable  Accrued  

Total  Current  Liabilities $2,780.00 

Deferred  Credits  to  Income: 

Rent  Unearned 

Net  Worth: 

Capital $5,633.00 

Net  Profit  1,242.00 

Total  Net  Worth 6,875.00 

Total  Liabilities $9,655.00 


$125.00 
40.00 
90.00 

1,200.00 

255.00 

$9,921.00 

$2,000.00 

780.00 

17.00 

20.00 

$5,633.00 
1,456.00 

$2,817.00 
15.00 

7,089.00 

$9,921.00 

The  Balance  Sheet  After  Adjustments 
Figure  6.  Here  you  have  the  unadjusted  and  the  adjusted  balance  sheets  side  by  side. 
You  can  easily  see  how  the  adjusted  balance  sheet  is  a  much  more  accurate  and  com- 
plete statement  of  the  financial  condition  than  the  balance  sheet  before  adjustments  are 
made.  Notice  that  Deferred  Charges  and  Deferred  Credits  are  shown  on  the  balance 
sheet  under  special  headings,  while  accrued  items  are  listed  under  Current  Assets  and 

Current  Liabilities. 

In  conclusion  it  will  be  desirable  to  see  graphically  how  the  periodic 
adjustments  for  accrued  and  deferred  items  are  brought  finally  into  the 

Assignment  16,  Page  12 


financial  statements.  Follow  the  arrows  on  the  chart  in  Figure  7,  and 
you  will  see  at  a  glance  how  these  adjustments  are  carried  from  the  work- 
ing sheet,  thru  the  journal  into  the  ledger,  and  then  by  means  of  the  ad- 
justed trial  balance  into  the  statements. 

THE  MAIN  POINTS  IN  THIS  ASSIGNMENT 

You  will  do  well  to  check  over  the  assignment  at  this  time  in  order  to 
assure  yourself  that  you  have  mastered  the  essential  accounting  prin- 
ciples. Use  the  following  outline  as  a  guide.  Then  apply  these  principles 
to  the  solution  of  the  problems. 

First — Ordinary  business  transactions  are  recorded  daily  in  the  books 
of  original  entry  and  the  ledger.  But  there  are  certain  values  that 
change  continuously  like  interest,  rent,  insurance,  etc.  They  are 
growing  larger  or  smaller  every  minute  and  hour.  These  are  called 
accrued  and  deferred  items.  To  bring  such  changes  of  value  im- 
mediately and  continually  into  the  books  would  require  too  much 
bookkeeping.  So  accountants  make  adjustments  for  these  items 
periodically,  i.  e.,  at  the  time  of  closing  the  books. 

Second — Accounts  must  be  examined  to  determine  what  items  are  to 
be  adjusted. 

Two  general  classes  of  items  need  adjusting. 

1.  Accrued  Assets  and  Accrued  Liabilities 

2.  Deferred  Charges  and  Deferred  Credits 

Third — Accrued  assets  include  such  items  as  interest  receivable,  com- 
missions receivable,  etc.  They  represent  earnings  that  increase  con- 
tinuously, but  are  not  yet  in  the  form  of  cash.  They  will  eventually 
be  collectible,  hence  they  are  classified  on  the  balance  sheet  under 
current  assets. 

Accrued  liabilities  include  such  items  as  interest  payable,  wages 
payable,  etc.  They  represent  expenses  that  accrue  continuously, 
but  which  have  not  yet  been  paid.  They  will  eventually  have  to 
be  paid,  hence  they  are  classified  on  the  balance  sheet  under  cur- 
rent liabilities. 

Fourth — Deferred  charges  are  assets  which  later  become  expenses  like 
ofl[ice  supplies  and  unexpired  insurance. 

Deferred  credits  are  liabilities  which  later  become  income,  such  as 
rent  received  in  advance. 

Fifth — These  accrued  and  deferred  items  are  brought  into  the  ledger 
by  means  of  the  working  sheet,  from  which  adjusting  journal  en- 
tries are  set  up.    These  journal  entries  are  posted  to  the  ledger. 

Sixth — After  adjustments  are  made  a  new  trial  balance  is  taken,  from 
which  the  financial  statements  are  set  up.  These  statements  will 
then  present  the  true  condition  and  progress  of  the  business,  and 
therefore  can  be  safely  used  by  the  manager  or  proprietor  for  com- 
parative purposes. 

Other  adjustments  for  depreciation  of  assets  and  for  probable  losses 
on  accounts  receivable  will  be  taken  up  in  the  next  assignment. 

Assi^ment  16,  Pa^e  13 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  16 

Send  in  solutions  for  all  the  following  problems.  If  you  can  apply  the 
principles  explained  in  the  assignment  to  the  problems,  you  will  be  pre- 
pared to  handle  similar  situations  in  actual  accounting  practice. 

1.  State  which  of  the  following  items  are  deferred  charges  to  Expense 
and  which  are  deferred  credits  to  Income. 

(a)  Prepaid  insurance 

(b)  Insurance  premium  received  in  advance 

(c)  Prepaid  rent 

(d)  Interest  paid  in  advance 

(e)  Water  tax  received  in  advance 

(f)  Interest  received  in  advance 

(g)  Prepaid  water  tax 

(h)  Rent  received  in  advance. 

2.  The  A.  B.  Kensington  Manufacturing  Company  insures  its  plant 
for  five  years  against  fire.  The  premium,  payable  in  advance,  amounts  to 
$870.00.    The  policy  is  issued  July  1,  1921. 

(a)  Show  two  methods  of  bringing  this  transaction  on  the  books  at  time  of 
payment  of  premium. 

(b)  Make  the  necessary  adjusting  journal  entry  on  December  31,  1921. 

(c)  What  entry  should  be  made  December  31,  1922? 

3.  From  the  following  trial  balance  and  supplementary  facts : 

(a)  Prepare  a  working  sheet. 

(b)  Make  adjusting  journal  entries  as  of  December  31,  1921. 

(c)  Make  a  profit  and  loss  statement  for  the  year  ended  December  31,  1921. 

(d)  Make  a  balance  sheet  as  of  December  31,  1921. 


TRIAL  BALANCE  OF  F.  BROWN  DRY  GOODS  STORE 
December  31,  1921 

Land                .  .   

Dr. 
S  20,000 
60,675 

4,065 
32,010 
27,900 

7,908 
60,000 

500 

4,592 

300 

10,000 

10,000 

250 
400 
440 
220 

Cr. 

$  27,500 

6,250 

93,750 

110,560 
1,200 

Buildings  

Cash    

Notes  Receivable       

Accounts  Payable        

Notes  Payable                  

F  Brown  Investment              

Merchandise  Inventory,  January  1,  1921 

Purchases            

Sales                     

Return  Sales  

Office  Salaries     

Office  Supplies     

Delivery  Expense     .   

Salesmen's  Salaries     .   .  .   

Interest  Earned               

Insurance                   

Taxes          

Interest  Expense  (Notes  Payable) 

$239,260 

$239,260 

Assignment  16,  Page  IS 


Inventories:     (Items  that  require  adjustment) 

Merchandise,   Dec.   31,   1921 _ _ _...$1,680 

Office  Supplies  _ _ 50 

Accrued  Interest  Payable _ _ _. 65 

Accrued  Interest  Receivable _ 75 

Accrued   Salesmen's   Salaries „ _ 2,000 

Accrued  Office   Salaries....! _ _ 675 

Unexpired  Insurance  _ _ - - _ 100 


Assignment  16,  Page  16 


Higher  Accountancy 

O  I  lO 

PRINCIPLES 
PRACTICE  ««/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  17 

PERIODIC  ADJUSTMENTS  for 

DEPRECIATION  and  UNCOLLECTIBLE 

ACCOUNTS 


''  I  ^HE  accounting  profession  has  many  attractive  possi- 
-^    bilities,  and  the  broadness  of  the  experience  of  a 
first-class  accountant  is  such  that  he  is  fitted  for  many 
things  in  the  business  world. 


WM.  H.  HOWE 

Auditor.  The  Diamond  Match  Co. 


LaSalle  Extension  University 

Chicago 


NHArlT 
(11-302) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


PERIODIC  ADJUSTMENTS 
FOR  DEPRECIATION  AND  UNCOLLECTIBLE  ACCOUNTS 

For  many  years  practicing  accountants  have  advised  business  men 
to  allow  for  depreciation  of  fixed  assets  and  make  provision  for  losses 
from  uncollectible  accounts.  This  they  have  advocated  for  accounting 
as  well  as  business  reasons ;  namely,  in  order  that  the  accounting  records 
and  the  financial  statements  may  reflect  the  true  condition  of  the  business. 

For  a  long  time  business  men  were  rather  reluctant  to  have  their 
books  show  such  losses.  When,  however,  the  Federal  Income  Tax  law 
went  into  effect,  they  immediately  saw  the  advantage  of  allowing  for  de- 
preciation and  of  writing  oflf  bad  debts,  because  they  found  that  the  gov- 
ernment permitted  the  deduction  of  such  items  in  determining  the  net 
taxable  income.  As  a  result,  ever  since  1913  accountants  have  met  very 
little  opposition  on  the  part  of  business  concerns  to  bringing  such  items 
into  the  accounts. 

Credit  Analysis  a  Modern  Practice.  Another  situation  that  has 
helped  to  give  the  proper  significance  to  losses  from  depreciation^  and 
uncollectible  accounts  is  the  progress  in  credit  analysis.  If  a  business 
house  fails  to  provide  for  such  losses  its  net  profit  will  be  overstated  and 
the  book  value  of  its  assets  will  be  too  large.  Credit  men  and  bankers 
are  pointing  out  to  business  men  that  such  losses  must  be  considered 
in  order  to  secure  accurate  figures,  which  are  essential,  not  only  to  the 
efficient  management  of  their  business,  but  also  necessary  to  the  safe 
extension  of  credit. 

In  this  Assigmnent  the  principles  that  govern  the  calculation  and 
recording  of  such  items  will  be  explained  and  illustrated.  You  will  find 
that  losses  from  depreciation  and  from  uncollectible  accounts  are  pro- 
vided for  in  the  records  periodically  by  adjustment  in  very  much  the 
same  way  that  accrued  and  deferred  items  were  adjusted  in  the  preced- 
ing assignment.  To  attempt  to  bring  these  items  into  the  records  daily 
would  require  too  much  time.  The  result  is  that  periodic  adjustments 
are  made: 

I.  For  Depreciation. 

II.  For  Uncollectible  Accounts. 

We  shall  now  consider  these  adjustments  separately. 

I.  PERIODIC  ADJUSTMENTS  FOR  DEPRECIATION 

To  understand  these  adjustments,  you  should  first  of  all  be  familiar 
with  the  nature  of  depreciation  and  its  causes. 

Depreciation  an  Operating  Expense.  Most  property  is  perishable.  In 
time  it  wastes  away  or  wears  out,  regardless  of  any  means  we  may  take 
to  prevent  it.  Buildings,  machinery,  and  equipment  of  all  kinds  wear 
out  or  decay,  and  thus  continually  diminish  in  value.    This  wearing  out 

NHA-17 


or  gradual  diminishing  in  value  is  called  Depreciation.  In  trading  con- 
cerns it  usually  represents  an  operating  expense,  which,  like  all  other 
expenses,  must  be  properly  accounted  for,  so  that  it  will  appear  both 
in  the  ledger  and  in  the  statements.  In  manufacturing  concerns,  of 
course,  part  of  this  depreciation  is  accounted  for  as  one  of  the  costs  of 
manufacturing  and  part  as  an  operating  expense. 

Suppose  that  on  January  2,  1917,  your  business  bought  an  auto 
truck  for  $3,000.00;  that  in  5  years'  time  this  truck  wears  out  and  you 
sell  it  for  $600.00.  Obviously,  you  have  an  operating  expense  here  of 
$2,400.00.  How  should  it  be  handled?  Would  you  charge  it  all  against 
the  profit  of  1921  ? 

That  certainly  would  not  be  good  accounting.  The  truck  has  served 
during  the  five  year  period,  and  because  of  that  service  its  value  has 
gradually  diminished.  Therefore,  this  reduction  in  value  should  be  dis- 
tributed in  some  equitable  way  over  the  five  years. 

If  it  is  assumed  that  each  year  should  bear  one-fifth  of  the  total  loss, 
then  at  the  end  of  each  year  $480.00  should  be  set  up  as  an  expense  of 
operation.  In  other  words,  depreciation  represents  a  continual  decrease 
in  the  cost  of  an  asset,  due  to  operations  of  the  business. 

Chief  Causes  of  Depreciation.  In  order  to  distribute  depreciation  ex- 
pense equitably  over  a  period  of  years,  we  must  determine  the  probable 
life  of  the  asset.  To  do  this  it  is  necessary  to  understand  the  causes 
of  depreciation.  For  example,  a  frame  building  will  be  affected  more  by 
weather,  climate,  etc.,  than  by  wear  and  tear.  A  machine  may  wear 
out,  or  it  may  become  inadequate,  more  quickly  than  a  building,  and 
need  to  be  replaced  with  another  machine  more  modern  and  up  to  date. 

The  following  summary  gives  the  four  causes  of  depreciation  as  they 
are  usually  classified : 

1.  Physical  Depreciation. 

(a)  Wear  and  tear  from  operations. 

(b)  Action  of  the  elements. 

2.  Functional  Depreciation. 

(a)  Inadequacy. 

(b)  Obsolescence. 

We  have  already  illustrated  physical  depreciation.  The  $3,000.00 
auto  truck,  for  example,  depreciates  in  value  for  reasons  stated  in  (a) 
and  (b)  under  1,  both  of  which  are  physical  causes. 

Functional  depreciation  refers  to  business  usefulness.  Suppose  a  busi- 
ness installs  machines  of  a  certain  type  costing  $10,000.00.  In  a  few 
years'  time  a  new  type  of  machine  is  invented  which  is  more  efficient, 
either  reducing  the  cost  of  operation  or  increasing  the  output.  Compe- 
tition from  users  of  the  new  machine  forces  the  proprietor  to  abandon 
the  old  machines  and  install  the  new  type,  costing  $20,000.00.  The  old 
machines  may  still  be  serviceable.    They  have  not  depreciated  fully  from 

Assignment  17,  Page  2 


wear  and  tear  or  from  the  elements.  In  fact,  they  may  be  in  almost 
perfect  operating  condition,  but  they  must  be  replaced  to  meet  competi- 
tors' production  or  costs. 

Suppose  the  old  machines  are  sold  as  secondhand  machines  for  $2,- 
500.00.  Since  the  machines  cost  $10,000.00,  there  is  a  loss  of  $7,500.00, 
which  represents  functional  depreciation.  It  is  evident  that  this  $7,500.00 
loss  should  not  all  be  loaded  on  the  period  in  which  the  machines  are 
sold.  Some  provision  should  have  been  made  to  distribute  it  over  the 
periods  in  which  the  machines  were  in  use. 

Adjustments  for  Depreciation  Expense.  In  showing  how  deprecia- 
tion is  entered  on  the  books  we  shall  use  again  the  case  of  the  auto 
truck  purchased  January  2,  1917,  for  $3,000.00.  The  total  amount  to 
be  written  off  or  depreciated  during  the  five-year  period  is  $2,400.00  (that 
is,  $3,000.00  minus  $600.00),  making  $480.00  for  each  year. 

The  first  thing  to  do  is  bring  the  $480.00  annual  depreciation  upon 
the  books  as  an  operating  expense.  This  is  accomplished  by  charging 
the  $480.00  to  an  expense  account — "Delivery  Expense"  or  "Deprecia- 
tion of  Delivery  Equipment." 

But  what  account  are  you  going  to  credit?  Your  first  impulse  might 
be  to  credit  the  $480.00  to  the  Delivery  Equipment  Account,  since  the 
depreciation  is  a  reduction  of  the  asset  value.  This  would  appear  to  be 
in  line  with  the  principle  explained  in  an  earlier  assignment,  that  asset 
accounts  are  increased  by  means  of  debits  and  decreased  by  means  of 
credits. 

This  method  would  be  satisfactory  if  the  depreciation  charge  repre- 
sented the  exact  amount  of  reduction  in  the  value  of  the  asset.  It  rep- 
resents, however,  an  estimated  shrinkage.  If  a  similar  credit  were  made 
to  the  asset  account  each  year  for  five  years,  the  total  credits  at  the 
end  of  five  years  would  amount  to  $2,400.00.  This  $2,400.00  credit  rep- 
resents an  estimated  loss  in  the  value  of  the  asset  on  the  assumption 
that  you  can  sell  it  for  $600.00.  You  may,  however,  get  more  or  less  than 
$600.00,  in  which  case  the  $2,400.00  will  represent  too  much  depreciation 
or  too  little. 

In  other  words,  any  credits  that  you  make  for  depreciation  are  "cred- 
its in  suspense,"  and  for  this  reason  they  should  not  be  entered  in  the 
asset  account.  The  asset  account  should  always  show  the  original  cost 
of  the  asset  and  should  not  become  complicated  with  credits  for  esti- 
mated losses.  If  such  credits  are  made  to  the  asset  account  the  original 
cost  might  be  obscured,  especially  in  cases  where  a  new  ledger  is  opened 
each  year.  No  asset  account  should  be  credited  except  at  the  time  the 
asset  is  retired  from  service. 

In  case  of  loss  from  fire  covered  by  insurance,  the  original  cost  must 
be  known  as  well  as  the  amount  written  off  as  depreciation,  so  as  to  make 
proper  adjustment  with  the  insurance  company.  In  case  of  a  prospec- 
tive sale,  also,  it  v/ould  be  more  desirable  to  have  the  original  cost  in  the 
current  record,  rather  than  be  compelled  to  analyze  a  complicated  account. 

Assignment  17,  Page  3 


Need  for  a  Reserve  for  Depreciation  Account.  To  meet  this  need  of 
business  for  definite  facts,  accountants  have  adopted  the  practice  of  cred- 
iting depreciation  to  a  special  account,  called  Reserve  for  Depreciation 
Account,  instead  of  making  the  credit  directly  to  the  asset  account.  In 
this  way  the  asset  account  will  always  show  the  original  cost  and  the 
Reserve  Account  will  show  the  suspended  credits  for  depreciation.  Thus 
the  book  value  can  be  easily  determined  at  any  time  by  subtracting  the 
reserve  from  the  original  cost. 

The  $480.00  annual  depreciation  of  delivery  equipment  in  our  illus- 
tration will  therefore  be  credited  to  the  Reserve  Account.  On  December 
31,  1917,  we  will  make  the  following  adjusting  entry: 

Dec.  31;  1917  Depreciation  of  Delivery  Eiiuipment  $480.00 

Reserve  for  Depreciation $480.00 

For  1  Year's  Depreciation  of  Delivery  Equipment. 

This  journal  entry  is  then  posted  to  the  accounts,  as  in  Figure  1. 
Depreciation  of  Delivery  Equipment 


1917 

Dec. 

31 

Depreciation 

$  480 

00 

Reserve  for  Depreciation 


1917 

Dec. 

31 

Depreciation 

$  480 

00 

Figure  1.  Accounts  showing  the  debit  and  credit  for  Depreciation 

The  Depreciation  Account  will  be  closed  on  December  31,  1917,  into 
the  Profit  and  Loss  Account.  The  Reserve  Account  will  remain  open  as 
an  offset  to  the  Delivery  Equipment  Account,  as  shown  in  Figure  2.  In 
other  words,  instead  of  crediting  the  depreciation  to  the  asset  account, 
we  set  up  a  temporary  account  into  which  we  enter  the  suspended  credits 
for  the  estimated  reduction  in  the  value  of  the  asset. 

Reserve  for  Depreciation  a  Valuation  Account.  This  Reserve  Ac- 
count has  a  growing  credit  balance,  because  similar  credits  will  be  made 
at  the  end  of  each  of  the  five  years  estimated  as  the  life  of  the  asset. 
Even  tho  the  account  has  a  credit  balance,  it  is  not  a  liability  account, 
since  it  does  not  represent  an  indebtedness.  It  is  in  fact,  nothing  more 
or  less  than  the  credit  side  of  the  asset  account,  set  aside  as  a  separate 


Assignment  17,  Page  4 


Delivery  Equipment 


1917 
Jan. 

1 

Delivery  Truck 

$3,000 

00 

Eeserve  for  Depreciation 


1917 

Dec. 


31 


Depreciation 


■B    480  00 


FiGUBE  2.    Reserve  Account  an  offset  to  the  asset  account 

account,  in  which  the  decreases  in  the  value  of  the  asset  are  recorded, 
as  illustrated  in  Figure  3. 

Asset  Account 


Figure  3.    Credit  Side  of  asset  account  developed  into  a  new  account 

Such  a  Reserve  Account  is  called  Valuation  Account,  because  its  credit 
balance  must  be  deducted  from  the  asset  account  in  determining  the 
book  value  of  the  asset.  Some  accountants,  therefore,  have  suggested  the 
title.  Allowance  for  Depreciation,  rather  than  Reserve,  because  it  di- 
rectly offsets  the  asset  account  and  represents  an  estimated  allowance 
for  depreciation. 

This  valuation  function  is  made  clearer  by  means  of  an  illustration. 

For  example,  the  book  value  of  the  auto  truck  on  December  31,  1917, 
can  be  determined  by  subtracting  the  $480.00  credit  in  the  Reserve  Ac- 
count from  the  original  cost,  $3,000.00,  which  stands  as  a  debit  in  the 
asset  account.  The  book  value  on  December  31,  1917,  therefore  is 
$2,520.00. 


Assignment  17,  Page  5 


Now  let  us  assume  that  similar  adjusting  entries  are  made  each  year 
for  five  years.  At  the  end  of  the  fifth  year  the  Reserve  will  have  a 
credit  balance  of  $2,400.00,  as  given  in  Figure  4. 


Reserve  for  Depreciation 

1917 
Dec. 
1918 
Dec. 
1919 
Dec. 
1920 
Dec. 
1921 
Dec. 

31 
31 
31 
31 
31 

S  480 
$  480 
$  480 
$  480 
$  480 

00 
00 
00 
00 
00 

FiGXJRB  4,    Reserve  Accoxint  at  the  end  of  five  years 

This  Reserve  shows  that  the  delivery  equipment,  which  originally 
cost  $3,000.00,  now  has  a  book  value  of  only  $600.00. 

How  to  Show  Depreciation  on  the  Balance  Sheet.  There  are  two  ways 
of  handling  the  Reserve  for  Depreciation  Account  on  the  balance  sheet, 
illustrated  in  Figure  5. 

1.  On  the  Liability  Side. 

2.  On  the  asset  side  as  a  deduction  from  the  original  cost. 

Method  1 

Balance  Sheet,  December  31,  1918 


Delivery  Equipment 
Other  Assets 

$  3,000 
117,000 

Liabilities 

Reserve  for  Depreciation 

Net  Worth 

$  20,000 

960 

99,040 

$120,000 

$120,000 

Balance 

Meth 

Sheet,  D 

od  2 

ecember  31,  1918 

Delivery  Equipment       $3,000 
Allowance  for  Depreciation    960 

$  2 , 040 
117,000 

Liabilities 
Net  Worth 

$  20,000 
99,040 

$119,040 

$119,040 

FiGtrHB  5.    Two  Methods  of  showing  Reserve  on  Balance  Sheet 

Both  methods  are  used  in  practice.  It  is  largely  a  matter  of  pref- 
erence which  method  to  use,  depending  mainly  on  the  purpose  or  use  of 
the  balance  sheet. 

There  may  be  an  advantage  in  showing  depreciation  subtracted  from 
the  original  cost  of  the  asset,  as  in  Method  2,  since  in  this  way  the  de- 
preciated value  of  the  asset  is  given  at  a  glance.  This  avoids  the  neces- 
sity of  making  the  subtraction  when  the  balance  sheet  is  analyzed  later. 


Assignment  17,  Page  6 


How  to  Determine  the  Depreciation  Rate.  One  kind  of  property  will 
naturally  depreciate  much  faster  than  another.  A  frame  building,  for 
example,  will  depreciate  at  a  faster  rate  than  a  stone,  brick,  or  concrete 
building.  Moreover,  the  same  building  would  depreciate  more  quickly 
if  it  contained  machinery  that  produced  heavy  vibrations  than  when  used 
for  storage  or  for  trading  purposes.  To  determine  the  rate  of  deprecia- 
tion, therefore,  you  must  analyze  each  case,  because  of  the  various  fac- 
tors that  must  be  considered. 

There  are  several  ways  of  determining  the  rate.  The  simplest  will 
be  mentioned  here,  namely,  the  "ordinary  life,"  or  "flat  rate."  Other 
methods  will  be  explained  in  a  later  section  of  the  course. 

Three  things  enter  into  the  determination  of  the  rate. 

1.  Original  cost. 

2.  Life  of  the  asset,  number  of  years  it  will  serve. 

3.  Probable  scrap  value. 

To  illustrate,  take  the  same  case  of  the  auto  truck,  purchased  for 
$3,000.00.    How  is  the  rate  of  depreciation  determined? 

What  will  be  the  value  of  this  auto  truck  at  the  end  of  the  first  year? 
It  has  been  in  use  during  the  year  and  the  paint  may  have  become  dam- 
aged, etc.    It  certainly  is  not  worth  $3,000.00. 

The  junkman  may  be  willing  to  pay  only  a  few  hundred  dollars  for 
it,  the  secondhand  dealer  may  give  $600.00  for  it,  another  business  con- 
cern may  pay  $2,000.00  or  more  for  it,  while  its  value  to  the  company 
itself  is  approximately  the  same  as  at  the  date  of  purchase.  It  is  neces- 
sary, therefore,  to  estimate  as  closely  as  possible  the  life  of  the  truck. 

If  it  can  reasonably  be  assumed  that  the  truck  costing  $3,000.00  will 
have  a  useful  life  of  five  years  and  an  estimated  scrap  value  of  $600.00 
at  the  end  of  that  time,  then  we  determine  the  rate  as  follows: 

Annual  Depreciation  ($480.00) -^Original  Cost   ($3,000.00)  =Rate   (16%) 

Retirement  of  Depreciated  Assets.  If  $480.00  is  charged  off  as  an 
expense  and  credited  to  a  Depreciation  Reserve  periodically,  the  Reserve 
will  amount  to  $2,400.00  at  the  end  of  the  five-year  term.  If  the  old 
truck  is  then  sold  for  $600.00,  the  old  asset  account  will  be  closed  by  the 
following  entry: 

Reserve  for  Depreciation $2,400.00 

Cash 600.00 

Delivery  Equipment $3,000.00 

After  the  journal  entry  is  posted,  the  asset  account  will  stand  closed, 
as  in  Figure  6. 

Delivery  Equipment 


Cost 

$3,000 

00 

Asset  Sold  and  Retired 

$3,000 

00 

$3,000 

00 

$3,000 

00 

FiGUBE  6.    Asset  account  closed  when  asset  is  retired 

Assignment  17,  Page  7 


In  actual  practice,  however,  it  seldom  happens  that  the  asset  is  sold 
exactly  for  the  estimated  scrap  value. 

Suppose  that  at  the  end  of  five  years  we  receive  only  $500.00  instead 
of  $600.00  for  the  truck  as  scrap  value.  The  $100.00  loss  would  be 
handled  by  debiting  Capital  (Surplus  in  case  of  corporations),  and  cred- 
iting the  Delivery  Equipment  Account,  thus: 

Capital $  100.00 

Delivery  Equipment $  100.00 

The  reason  for  charging  this  difference  to  Capital  is  that  since  the 
amount  of  depreciation  was  underestimated  in  the  beginning  the  Capital 
has  been  credited  with  a  profit  that  is  too  large.  Hence  the  additional 
$100.00  should  be  charged  against  the  Capital  Account.  The  asset  ac- 
count will  stand  closed,  as  given  in  Figure  7. 

Delivery  Equipment 


Cost 

$3,000 

00 

Reserve  for  Depreciation 

Cash  (scrap) 

Capital 

$2,400 
500 
100 

00 
00 
GO 

$3  ,000 

00 

$3,000 

00 

1 — 1 

1 

Figure  7.    Asset  account  closed  when  asset  is  sold  for  less  than  estimated  amount 

On  the  other  hand,  let  us  suppose  we  receive  $700.00  instead  of  $600.00 
for  the  truck.  If  this  is  received  in  cash,  the  $100.00  excess  will  be  deb- 
ited to  Cash  and  credited  to  Capital,  the  Delivery  Equipment  Account 
receiving  the  $600.00  credit  needed  to  balance  it,  thus: 

Cash $700.00 

Delivery  Equipment $600.00 

Capital  100.00 

It  is  evident  that  the  Capital  Account  should  be  credited  here  with 
the  $100.00,  for  in  ^vriting  off  too-heavy  depreciation  during  the  life  of 
the  asset  the  Capital  Account  has  been  overcharged  by  that  amount  thru 
Profit  and  Loss,  and  hence  crediting  the  excess,  $100.00,  to  the  Capital 
Account  would  restore  it  to  its  proper  condition. 

When  the  estimated  life  of  an  asset  proves  to  be  too  large  or  too 
small,  similar  adjustments  must  be  made  to  Capital  or  Surplus.  For 
example,  if  at  the  end  of  the  fourth  year  we  find  that  the  truck  is  worn 
out,  this  means  that  we  have  overestimated  the  life  by  one  year.  As- 
suming that  we  sell  the  truck  for  $600.00  at  the  end  of  the  fourth  year, 
we  would  make  the  following  entry : 

Cash $  600.00 

Capital  480.00 

Reserve  for  Depreciation 1,920.00 

Delivery  Equipment $3,000.00 

To  close  the  Equipment  Account 

In  case  we  underestimate  the  life  of  the  truck,  an  adjustment  must 
also  be  made  to  correct  the  Surplus  or  Capital  Account.     For  example. 


Assignment  17,  Page  8 


suppose  that  at  the  end  of  five  years  we  find  that  the  truck  will  still  be 
useful  for  another  year,  with  a  probable  scrap  value  of  $600.00  at  the 
end  of  the  sixth  year.  This  means  that  we  have  charged  into  operations 
$80.00  too  much  each  year.  The  annual  charge  should  have  been  $400.00 
instead  of  $480.00.  The  Reserve  Account  should  have  a  credit  balance  of 
$2,000.00  instead  of  $2,400.00  at  the  end  of  the  fifth  year.  The  following 
adjusting  entry  will  therefore  be  made: 

Reserve  for  Depreciation $400.00 

Surplus  $400.00 

Repairs  and  Renewals  of  Parts.  Repairs  and  Renewals  are  intended 
to  keep  the  asset  in  good,  serviceable  condition,  while  depreciation  ap- 
portions the  cost  of  an  asset  over  the  term  of  years  benefited  by  its 
service. 

On  the  other  hand,  it  is  a  fact  that  an  asset  will  not  depreciate  so 
fast  if  it  is  kept  in  good  repair.  If  repairs  are  neglected,  the  life  of  the 
asset  will  be  shortened.  Therefore  in  estimating  the  life  of  an  asset  and 
determining  the  rate  of  depreciation  allowance  should  be  made  for  reas- 
onable maintenance. 

Replacements  of  Depreciated  Assets.  Under  Replacements  let  us  con- 
sider two  possible  cases: 

1.  Old  asset  sold  and  new  asset  bought. 

2.  Old  asset  traded  in  as  part  of  purchase  price  of  new. 

P'or  the  first  case,  assume  that  machinery  costing  $10,000.00  is  esti- 
mated to  have  a  life  of  ten  years  and  a  scrap  value  at  the  end  of  ten 
years  of  $1,000.00.  At  the  end  of  five  years  the  machinery  is  sold  for 
$6,000.00  and  replaced  with  new  machinery  costing  $20,000.00. 

The  Reserve  for  Depreciation  Account  was  credited  each  year  with 
$900.00.  Therefore  at  the  end  of  the  fifth  year,  when  the  machinery  is 
sold,  the  Reserve  has  a  credit  balance  of  $4,500.00. 

This  transaction  requires  three  entries. 

1.  Entries  for  the  sale  of  the  old  machinery. 

2.  Entries  for  the  purchase  of  the  new  machinery. 

3.  Entries  for  the  retirement  of  the  old  asset. 

1.  For  the  sale  of  old  machinery: 

Cash $6,000.00 

Machinery  (Old  asset)  $5,500.00 

Capital  (or  Surplus) 500.00 

2.  For  the  purchase  of  new  machinery: 

Machinery  (New  asset) $20,000.00 

Cash  (or  Accounts  Payable) $20,000.00 

3.  For  the  retirement  of  the  asset: 

Reserve  for  Depreciation $4,500.00 

Machinery   (Old  asset)   $4,500.00 

Assignment  17,  Page  9 


Now  take  the  second  case  mentioned  above,  namely,  replacing  an 
asset  by  trading  in  the  old  asset.  Suppose  that  the  old  machines  were 
traded  in  at  the  end  of  the  fifth  year  as  part  payment  for  the  new  ma- 
chines. The  trade-in  value  allowed  for  the  old  machines  may  be  assumed 
to  be  $5,000.00,  which  is  $4,000.00  more  than  the  estimated  scrap  value. 
The  entries  for  this  transaction  will  be: 

(a)  Reserve  for  Depreciation $4,500.00 

Machinery  (Old  asset)  $4,500.00 

To  close  the  Reserve 

(b)  Machinery $20,000.00 

Accounts  Payable $15,000.00 

Machinery  (Old  asset)  5,000.00 

To  record  purchase  of  new  machinery. 

(c)  Surplus  $500.00 

Machinery  (Old  asset)  $500.00 

To  record  the  loss  on  sale. 

II.  PERIODIC  ADJUSTMENTS  FOR  UNCOLLECTIBLE  ACCOUNTS 

Method  of  Recording  Bad  Debt  Losses  as  They  Occur.  One  method 
of  handling  losses  on  customers'  accounts  is  to  charge  these  losses  off 
only  as  they  occur,  without  making  any  provision  for  them  in  advance. 
In  this  case  no  Reserve  is  used.  For  instance,  when  it  is  found  that  Mr. 
Jones'  Account  of  $215.00  cannot  be  collected,  the  entry  under  this  method 
will  be: 

Loss  on  Bad  Debts  (or  Bad  Debts) $215.00 

Accounts  Receivable--Jones  $215.00 

This  Bad  Debts  Account  is  closed  into  Profit  and  Loss  in  the  sanie 
way  other  expense  accounts  are  closed  at  the  end  of  the  period.  This 
method  however  is  not  acceptable,  since  it  charges  the  current  period 
with  a  loss  on  an  account  that  may  be  of  large  amount  and  may  have 
been  standing  on  the  books  for  a  time  running  back  over  several  periods. 
The  better  method  is  shown  in  the  next  paragraph. 

Better  Method  of  Estimating  Losses  from  Bad  Accounts.  The  prob- 
able losses  on  customers'  accounts  may  be  estimated  in  advance  by  one 
of  the  following  methods: 

1.  By  taking  a  percentage  of  Sales. 

2.  By  taking  a  percentage  of  Accounts  Receivable. 

3.  By  an  inspection  of  Open  Accounts. 

The  percentage  of  bad  debts,  as  based  on  net  sales,  seems  to  be  the 
method  most  commonly  used.  To  determine  this  percentage  for  any 
particular  business,  past  records  must  be  inspected  and  an  average  taken. 
This  percentage,  of  course,  varies  in  different  businesses,  depending  upon 
its  nature  and  on  local  conditions. 

Assignment  17,  Page  10 


In  some  businesses  it  is  a  small  fraction  of  1  per  cent.  In  others  you 
will  find  that  the  percentage  is  higher,  and  in  businesses  carrying  in- 
stallment accounts  it  may  run  very  high. 

Reliable  investigations  were  made  by  the  Harvard  Bureau  of  Research 
and  System  in  1919,  which  show  the  average  amount  for  various  lines  of 
business.  For  example,  for  furniture  stores,  l%o  per  cent  is  the  average 
loss  from  bad  debts,  almost  20  times  as  large  as  for  variety  stores,  which 
has  been  found  to  be  one-tenth  of  1  per  cent.  Jewelry  and  Dry  Goods 
have  about  two-tenths  of  1  per  cent  loss,  while  hardware  and  clothing 
lines  run  around  three-tenths  of  1  per  cent. 

Suppose  that  it  is  estimated  that  2  per  cent  of  net  sales  is  a  fair 
amount  to  consider  as  loss,  and  that  net  sales  amount  to  $150,000.00  an- 
nually. This  would  mean  a  loss  of  $250.00  for  each  month,  which  would 
be  charged  to  Expense  and  credited  to  a  Reserve  for  Doubtful  Accounts. 

It  may  happen  during  any  month  or  period  that  there  will  be  no  actual 
losses  incurred  on  customers'  accounts,  but  it  is  good  business  policy  to 
make  this  provision,  nevertheless.  The  collection  department  records  will 
serve  as  a  guide  in  establishing  the  amount  of  loss  to  be  reserved. 

In  case  a  customer's  account  proves  uncollectible,  as  in  the  case  of 
Jones',  mentioned  above,  the  amount  of  the  loss  will  be  written  off  against 
this  Reserve  by  debiting  the  Reserve  and  crediting  the  Accounts  Receiv- 
able Account;  for  example,  thus: 


Reserve  for  Doubtful  Accounts  $215.00 


Accounts  Receivable--Jones 


$215.00 


To  write  off  the  balance  of  Jones'  Account  or  Loss. 

The  account  of  the  customer  will  now  appear  closed,  as  shown  in 
Figure  8. 

Jones 


1922 

Merchandise 
Merchandise 
Merchandise 

S   74 
332 
184 

00 
50 
25 

1922 

Cash 
Cash 
Cash 

To  Res.  for 
Doubtful  Accts. 

$  140 

76 

160 

215 

00 
00 
75 

00 

$  590 

75 

$  590 

75 

Figure  8.    Customer's  Account  closed  out  as  uncollectible 

If  it  should  turn  out  that  a  customer  makes  payment  on  his  account 
after  it  has  already  been  written  off  as  worthless,  the  entry  for  this  pay- 
ment would  be  a  debit  to  Cash  and  a  credit  to  Surplus  (in  case  of  a  cor- 
poration) or  to  Capital  (in  case  of  an  unincorporated  concern). 

Treatment  of  Reserve  for  Doubtful  Accounts  on  Balance  Sheet.    The 

Reserve  for  Doubtful  Accounts  may  be  shown  on  the  balance  sheet  just 
like  Depreciation  Reserves,  either  as  a  deduction  from  the  Accounts  Re- 
ceivable Account  on  the  asset  side  or  with  other  items  on  the  liability  side. 


Assignment  17,  Page  11 


Reserve  Accounts  in  the  Working  Sheet.  Both  depreciation  and  loss 
from  bad  debts  are  adjusted  in  the  working  sheet,  along  with  the  other 
adjustments  for  accrued  and  deferred  items,  unless  standard  entries  have 
been  made  for  monthly  adjustments.  In  the  adjustments  column  the 
Expense  Accounts  are  debited  and  the  Reserve  Accounts  are  credited, 
thus: 

Depreciation  

Reserve  Depreciation 

Loss  on  Bad  Debts 

Reserve  for  Doubtful  Accounts  

These  amounts  are  then  extended  into  the  other  columns  of  the  work- 
ing sheet.  Both  debits  and  credits  are  carried  over  into  the  Adjusted 
Trial  Balance  column.  Then  the  Expense  items  are  carried  into  the 
Profit  and  Loss  columns.  The  Reserves  are  then  extended  in  the  liability 
column,  not  because  they  are  Hability  accounts  but  because  they  offset 
the  asset  accounts. 

IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

The  main  points  of  this  Assignment  may  be  briefly  summarized  as 
follows : 

First.  The  Principle  of  Adjustment.  Fixed  assets  depreciate,  and  this 
depreciation  should  be  adjusted  periodically.  Losses  from  doubtful 
accounts  should  also  be  recognized  and  brought  into  the  accounts 
by  means  of  adjusting  entries.  These  adjustments  provide  an 
equitable  distribution  of  expenses  and  losses  to  the  period  in  which 
they  occur. 

Second.  The  asset  accounts  should  be  left  undisturbed  and  should  always 
show  the  original  cost.  Estimated  decreases  in  asset  values  should 
not  be  credited  to  asset  accounts,  but  rather  to  valuation  accounts, 
such  as  the  Reserve  for  Depreciation  and  the  Reserve  for  Doubtful 
Accounts. 

Third.  These  Reserve  Accounts  will  be  closed  finally  into  the  assets  ac- 
counts, when  the  assets  are  disposed  of  or  when  their  value  is  read- 
justed on  the  books. 

Fourth.  The  Reserve  Accounts  may  be  shown  in  two  ways  on  the  balance 
sheet. 

(a)  As  deductions  from  the  assets  on  the  asset  side. 

(b)  On  the  liability  side  of  the  balance  sheet. 

Fifth.  These  Reserve  Accounts  are  called  Valuation  Accounts  because 
they  must  be  considered  along  with  the  asset  accounts  in  determin- 
ing the  book  value  of  the  assets. 


Assignment  17,  Page  12 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  17 

The  following  five  practical  problems  illustrate  the  principles  ex- 
plained in  the  assignment.  Prepare  solutions  that  will  indicate  to  your 
instructors  that  you  have  thoroly  mastered  this  Assignment.  They  are 
similar  to  situations  you  must  handle  in  actual  accounting  practice. 

1.  Mr.  Richards  did  not  adjust  his  books  for  the  follo\ving  items. 
These  adjustments  were  usually  made  by  the  auditor  at  the  end  of  each 
period.  You,  as  the  auditor,  are  expected  to  make  the  adjusting  journal 
entries  necessary  to  bring  the  items  into  the  ledger  at  time  of  closing  the 
nominal  accounts,  June  30,  1922. 

Wages  Payable $110.15 

Interest  Payable 91.12 

Unexpired  Insurance  54.13 

Depreciation  of  Buildings  350.00 

Depreciation  of  Furniture  115.00 

Depreciation  of  Machinery  450.75 

Estimated  Losses  from  Doubtful  Accounts  165.00 

Accrued  Taxes  89.00 

Office  Supplies  on  hand  134.00 

2.  (a)  When  these  adjusting  entries  have  been  made,  will  the  net 
profit  figures  in  the  Profit  and  Loss  statement  be  larger  or  smaller  than 
if  they  were  not  made?    By  how  much? 

(b)  How  will  the  entries  aifect  the  balance  sheet  items,  assets, 
liabilities,  and  net  worth? 

3.  On  January  1,  1921,  Mr.  Richards  paid  $14,000.00  for  the  building, 
$2,300.00  for  furniture,  and  $4,507.50  for  machinery.  Since  that  time 
Depreciation,  shown  in  Problem  1,  has  been  charged  every  6  months.  The 
depreciation  charged  off  on  June  30,  1922,  is  also  for  a  period  of  six 
months. 

(a)  What  is  the  rate  of  annual  depreciation  for  each  of  these 
assets  ? 

(b)  What  is  the  credit  balance  in  the  Reserve  Accounts  on  June 
30,  1922? 

4.  Mr.  Williams  bought  machines  for  $13,000.00  on  January  1,  1912. 
He  estimated  that  the  machines  would  last  10  years,  with  a  probable 
scrap  value  of  $1,000.00. 

On  January  1,  1922,  he  sold  the  machines  for  $1,200.00.  Show  the 
following. 

(a)  Machines  Account  on  January  1,  1922,  after  it  is  closed. 

(b)  Reserve  for  Depreciation  Account  after  it  is  closed. 

(c)  How  will  you  handle  the  $200.00  excess  received  from  the 
sale  of  the  machines. 

Assi^ment  17,  Page  13 


5.  The  following  depreciation  schedule  gives  you  a  list  of  the  assets 
in  Mr.  Robert's  business  for  which  he  is  providing  depreciation.  The  two 
columns,  headed  "Rate"  and  "Annual  Charge,"  are  to  be  filled  out  and  a 
list  of  the  amounts  sent  in. 

(a)  Determine  the  amounts  that  should  go  in  the  two  columns. 

(b)  Set  up  the  adjusting  journal  entries  as  of  December  31,  1922. 

Depreciation  Schedule 


Estimated 

Estimated 

lotal 

Date 

Items 

Units 

Original 

Life 

Scrap 

Deprecia- 

Rate 

Annual 

Purchased 

Cost 

(Years) 

Value 

tion 

1 

Charge 

1922 

Jan. 

15 

Store — Brick 

1 

$25,000 

00 

60 

$1,000 

00 

$24,000 

00 

Jan. 

15 

Warehouse — Concrete 

1 

8,000 

00 

75 

None 

8,000 

00 

Jan. 

15 

Garage — Stone 

1 

1,700 

00 

75 

200 

00 

1,500 

00 

Jan. 

15 

Shed — Frame 

1 

750 

00 

15 

None 

750 

00 

Feb. 

1 

Stable— Sheet 

Metal  and  Frame 

1 

2,000 

00 

20 

None 

2,000 

00 

Feb. 

1 

Office  Furniture 

3,600 

00 

12 

600 

00 

3,000 

00 

Feb. 

1 

Store  Equipment 

9,300 

00 

10 

500 

00 

8,800 

00 

Mar. 

15 

Gas  Engines 

2 

1,200 

00 

25 

100 

00 

1,100 

00 

Apr. 

1 

Wagons 

3 

385 

00 

18 

None 

385 

00 

Apr. 

5 

Horses 

7 

910 

00 

7 

None 

910 

00 

Apr. 

5 

Trucks 

5 

18,000 

00 

5 

1,000 

00 

17,000 

00 

Assignment  Iv,  Page  14 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  18 

PARTNERSHIP  ACCOUNTING 

FORMATION  AND  OPERATION 


rIS  a  self-evident  fact,  during  these  times  when  the 
entire  business  world  is  readjusting  itself  to  a  nor- 
mal basis,  that  anyone  who  wants  to  rise  above  the 
rank  and  file  in  any  profession  or  business  not  only 
requires  ability,  but  must  avail  himself  of  every  possi- 
ble assistance  to  qualify  himself  for  the  work  he  hopes 
and  expects  to  accomplish. 

Geo.  H.  Hess,  Jr.,   Comptroller 

Great  Northern  Railway  Company 


LaSalie  Extension  University 

Chicago 


NHA-I8 
(11-302) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

2/.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


PARTNERSHIP  ACCOUNTING 
FORMATION  AND  OPERATION 

The  accounting  procedure  presented  in  the  preceding  assignments  has 
been  applied  specifically  to  a  business  owned  by  a  single  individual,  ordi- 
narily known  as  a  sole  proprietorship.  This  procedure  has  dealt  primarily 
with  operating  records  and  statements  and  applies  pretty  generally  also 
with  concerns  owned  by  more  than  one  person. 

Partnerships,  however,  require  extra  consideration,  because  special 
accounting  problems  arise  in  connection  with  capital  accounts.  For  ex- 
ample, Mr.  Green,  who  owns  a  business,  sells  out  and  form.s  a  partnership 
with  Mr.  White.  Instead  of  having  only  one  Capital  Account,  as  was  the 
case  previously  when  Mr.  Green  was  the  sole  proprietor  of  a  business, 
there  are  now  two  Capital  Accounts,  one  for  each  partner. 

Assume  that  when  the  partnership  is  formed,  each  partner  invests 
$10,000.00.  We  will  credit  $10,000.00  to  each  partner's  account,  instead  of 
crediting  the  total  $20,000.00  to  one  capital  account.  As  each  partner 
makes  withdrawals,  his  account  is  debited.  Sometimes  the  charge  is  made 
to  a  drawing  account  instead  of  the  Capital  Account.  When  he  adds  to  his 
investment,  his  Capital  Account  is  credited.  Numerous  adjustments  must 
be  made  in  the  Capital  or  Drawing  accounts  for  profits  or  losses,  interest 
on  investment  and  withdrawals,  and  similar  transactions  that  arise  dur- 
ing the  operation  of  the  partnership.  Accounting  problems  for  partner- 
ships thus  involve  mainly  the  partner's  capital  accounts,  or  special  sub- 
sidiary accounts. 

In  order  to  handle  these  problems  correctly,  the  accountant  should  be 
familiar  with  partnership  organization  and  operation.  First  of  all  he 
should  know  what  a  partnership  is  and  how  it  is  formed. 

Partnership  Based  on  Contract.  A  partnership  consists  of  an  agree- 
ment or  contract  between  two  or  more  persons,  to  carry  on  a  certain  busi- 
ness.   Chancellor  Kent  has  defined  a  partnership  as  a 

"relation  resulting  from  a  contract  of  two  or  more  competent  persons 
who  place  their  money,  effects,  labor,  and  skill,  or  some  one  or  all  of 
them,  in  lawful  commerce  or  business,  and  who  divide  the  losses  or 
profits  in  certain  proportions." 

This  partnership  contract  may  be  oral  or  written.  If  written  it  should 
be  properly  signed  by  all  the  partners.  It  is  usually  desirable  to  have  the 
contract  in  writing,  since  the  partnership  may  continue  longer  than  a  year, 
in  which  case  a  mere  oral  agreement  would  not  be  enforceable  under  the 
statute  of  frauds.  Moreover  a  verbal  agreement  may  lead  to  disputes 
among  partners. 

It  is  generally  desirable  to  have  the  partnership  contract  drawn  up  by 
an  attorney  and  reviewed  by  an  accountant  who  is  well  versed  in  partner- 
ship law.    This  contract  is  commonly  called  the  Articles  of  Agreement. 


Articles  of  Agreement  an  Aid  to  the  Accountant.  If  the  Articles  of 
Agreement  are  properly  drawn  up,  they  will  contain  certain  clauses  which 
will  simplify  many  problems  of  partnership  accounting.  The  contract 
should  specify,  in  every  case,  the  following: 

1.  The  name,  location,  and  nature  of  the  business. 

2.  The  length  of  time  during  which  the  partnership  is  to  operate;  otherwise,  the 
agreement  holds  indefinitely  or  as  limited  by  law. 

3.  The  duties  and  powers  of  each  partner  and  the  time  to  be  devoted  to  the  busi- 
ness. If  these  points  are  not  specifically  covered,  there  will  be  many  oppor- 
tunities for  dispute.  For  example,  in  common  law,  each  partner  has  the  right 
to  sign  checks,  drafts,  acceptances,  or  any  other  contract,  using  the  name  of 
the  firm.  Unless  these  powers  are  restricted,  one  partner  may  easily  take 
advantage  of  his  rights,  to  the  detriment  of  another  member. 

4.  The  amount  of  capital  to  be  contributed  by  each  partner,  with  a  time  limit  for 
its  payment.  All  property,  other  than  cash,  should  be  carefully  valued,  and 
the  value  agreed  upon  should  be  made  a  part  of  the  articles  of  agreement. 

5.  Whether  interest  is  to  be  allowed  on  capital.  If  this  is  not  specified,  interest  is 
not  to  be  credited  to  partners,  even  tho  the  investment  of  one  is  much  greater 
than  others.  If  interest  is  to  be  allowed  the  partners,  but  no  rate  is  men- 
tioned, the  legal  rate  applies. 

6.  The  basis  on  which  profits  and  losses  are  to  be  shared.  If  nothing  is  said  on 
this  point,  profits  and  losses  will  be  shared  equally,  even  tho  the  investment  of 
one  partner  is  greater  than  that  of  another.  If  the  partnership  agreement 
specifies  how  profits  are  to  be  divided,  but  says  nothing  regarding  the  sharing 
of  losses,  the  same  basis  will  prevail  for  sharing  losses  as  for  sharing  profits. 

7.  The  conditions  under  which  withdrawals  may  be  made,  either  in  merchandise 
or  in  cash.  If  the  articles  of  agreement  are  silent  on  this  point,  interest  is 
not  charged  on  withdrawals,  as  such  items  are  considered  personal  charges 
withdrawn  in  anticipation  of  profit.  If  such  withdrawals  become  excessive,  as 
a  matter  of  equity,  the  courts  will  often  require  interest  to  be  charged,  but 
ordinarily  the  principle  given  above  will  stand. 

8.  The  salaries  or  commissions  to  be  allowed  each  partner.  Otherwise,  the  part- 
ners are  not  entitled  to  specific  compensation  for  their  services. 

9.  The  method  of  keeping  the  books  and  special  points  regarding  the  accounts. 
For  example,  whether  they  shall  be  open  to  inspection  by  all  the  partners, 
when  the  books  are  to  be  closed,  annually  or  semiannually,  etc. 

10.  Provision  for  discontinuing  the  partnership  in  case  of  a  voluntary  dissolution, 
or  in  case  of  the  death  of  one  of  the  partners.  If  this  point  is  not  specifically 
covered,  the  estate  of  a  deceased  partner  is  that  of  his  interest  at  date  of  death. 
This  may  make  it  necessary  to  take  an  inventory  and  close  the  books  as  of 
that  date,  which  sometimes  becomes  a  rather  complicated  matter. 

11.  Provision  in  regard  to  admitting  a  new  partner,  especially  the  treatment  of 
goodwill  under  such  circumstances. 

These  various  articles  of  agreement  should  be  carefully  studied  by  the 
accountant,  so  that  he  will  be  able  to  make  the  opening  entries  correctly. 

OPENING  ENTRIES  FOR  A  NEWLY  ORGANIZED  PARTNERSHIP 

There  are,  in  general,  three  conditions  under  which  a  partnership  can 
come  into  existence,  and  each  of  these  conditions  determines  what  entries 
are  to  be  made  on  the  books. 

•    1.    When  each  partner  makes  an  original  investment. 
Assignment  18,  Page  2 


2.  When  a  partner  is  admitted  to  an  established  business. 

3.  When  two  or  more  operating  businesses  unite  to  form  a  partner- 
ship. 

1.  When  Each  Partner  Makes  an  Original  Investment.  A  new  busi- 
ness may  be  formed  by  two  or  more  parties,  neither  of  whom  has  been  in 
business  immediately  preceding,  i.e.,  there  is  no  established  business,  no 
store,  and  no  stock  of  goods. 

To  illustrate,  assume  that  Mr.  Green  and  Mr.  White  each  invest  $10,- 
000.00  in  the  opening  of  a  firm  under  the  name  of  Green  &  White.  Your 
first  entry  in  the  journal  will  be  as  follows: 

June  1,  1921  Cash $20,000.00 

A.  Green,  Capital  $10,000.00 

B.  White,  Capital  10,000.00 

To  record  the  original  in- 
vestments of  Messrs.  A. 
Green  and  B.  White,  as  per 
their  agreement,  dated  June 
1,  1920. 

The  $20,000.00  should  also  be  entered  in  the  cash  book,  to  provide  a 
complete  record  of  original  investment.  The  debit  in  the  journal  and  the 
credits  in  the  cash  book  are  checked  (V)  to  prevent  duplicate  posting. 

As  the  business  begins,  liabilities,  of  course,  will  be  incurred.  The 
Cash  Account  will  be  affected  by  sales  and  purchases  and  the  other  ordi- 
nary transactions  of  a  going  business, 

2.  When  Partner  Is  Admitted  to  Established  Business.  Mr.  Brown  has 
been  in  business  for  five  years.  He  has  a  net  worth  or  capital  at  the  pres- 
ent time  of  $10,000.00.  His  business  is  growing,  and  so  he  looks  about  for 
a  partner  with  additional  capital.  He  finally  consents  to  reorganize  his 
business  into  a  partnership  and  admits  Mr.  Black.  Mr.  Black  invests  $12,- 
000.00.  The  two  partners  sign  an  agreement  which  specifies  that  Mr. 
Black  shall  be  admitted  as  an  equal  partner.  This  means  that  Mr.  Black 
is  to  pay  in  $12,000.00  for  an  interest  equal  to  Mr.  Brown's.  The  total 
investment  is  now  $22,000.00,  which  must  be  divided  equally  between  the 
two  partners. 

The  $2,000.00  excess  is  a  premium  or  bonus  which  Mr.  Black  pays  for 
the  privilege  of  being  admitted  into  an  established  business.  This 
$2,000.00  premium  is  for  the  goodwill.  The  correct  entries  for  recording 
this  transaction  are: 

June  30,  1921     Cash $12,000.00 

Mr.  Black,  Capital   $12,000,00 

Cash  invested  by  Mr.   Black 
for  one-half  interest  in  the 
business  of  Mr.   Brown,  as 
per  agreement  dated  June 
30,   1921. 

Assignment  18,  Page  3 


Mr.  Black,  Capital  $^1,000.00 

Mr.  Brown,  Capital  *        $  1,000.00 

To  equalize  the  Capital  Accounts 
of  the  two  partners,  due  to  the 
realization  by  Mr.  Brown  of  one- 
half  of  the  goodwill  for  which 
Mr.  Black  paid  $2,000.00 

It  is  very  necessary  in  a  transaction  of  this  kind  to  analyze  the  facts 
carefully  in  order  to  get  at  the  true  effect  in  the  debit  and  credit  elements. 
The  facts  in  this  case  are  as  follows: 

(a)  Mr.  Black  pays  into  the  business $12,000.00 

(b)  Mr.  Brown  has  an  investment  from  past  activities  of....  10,000.00 

Total  Invested  Capital $22,000.00 

Share  of  Mr.  Black  in  new  enterprise. $11,000.00 

Share  of  Mr.  Brown  in  new  enterprise 11,000.00 

Total  Capital  as  above $22,000.00 

The  essential  fact  in  this  case  is  the  true  invested  capital  in  the  new 
enterprise.  It  is  true  that  Mi'.  Brown  requires  an  investment  on  the  part 
of  Mr.  Black  of  $2,000.00  in  excess  of  his  former  net  worth,  but  by  the 
terms  of  the  agreement  Mr.  Black  retains  a  one-half  interest  in  this  excess 
over  Mr.  Brown's  former  capital,  namely  $1,000.00.  The  amount  of  good- 
will reahzed  by  Mr.  Brown,  therefore,  is  $1,000.00  which  is  credited  to  his 
Capital  Account.  The  business  receives  the  benefit,  however,  of  the  full 
$12,000.00  paid  in  by  Mr.  Black;  for  this  reason  there  is  no  record  made 
of  the  $2,000.00  goodwill. 

Had  the  $2,000.00  been  paid  to  Mr.  Brown  on  the  side,  as  a  bonus,  and 
only  the  $10,000.00  put  into  the  business,  the  new  partnership  would  not 
have  received  the  benefit  of  the  excess  paid  by  Mr.  Black  for  a  half  inter- 
est, but  Mr.  Brown  would  have  benefited  personally  for  the  full  amount. 
Accordingly,  it  makes  considerable  difference  whether  the  "premium"  for 
admittance  into  a  partnership  is  paid  directly  to  the  party  already  in  the 
business,  or  whether  it  is  paid  into  the  business  itself.  The  articles  of 
agreement,  as  well  as  the  opening  entry,  should  make  this  point  clear. 

3.  When  Two  or  More  Proprietorship  Businesses  Form  a  Partnership. 
A  situation  of  this  kind  requires  two  sets  of  transactions. 

1.  Closing  entries  on  the  books  of  the  old  businesses. 

2.  Opening  entries  on  the  books  of  the  new  partnership. 

The  property  of  each  business  is  first  valued,  including  goodwill  in  each 
case,  and  the  old  asset  and  the  liability  accounts  are  then  debited  and 
credited  with  the  respective  amounts  of  each  concern  on  the  books  of  the 
new  concern.  Each  member  of  the  new  partnership  is  credited  with  the 
net  value  of  his  investment  as  agreed  upon  in  the  contract.  In  case  two 
partnerships  combine,  or  if  a  single  proprietorship  and  a  partnership  com- 
bine, the  former  partnership  relations  must  first  be  dissolved. 

As  an  illustration,  assume  that  Mr.  Klein  and  Mr.  Newton  have  agreed 
to  form  a  partnership,  each  constituting  a  sole  proprietorship.  The  two 
following  balance  sheets  show  how  each  of  these  businesses  stand  at  the 
date  of  forming  the  partnership.  You  will  note  that  neither  concern  has 
controlling  accounts  for  customers'  and  creditors'  accounts.  It  is  agreed 
that  in  the  new  business,  controlling  accounts  should  be  used. 

Assignment  18,  Page  4 


Mr.  Klein 

BALANCE  SHEET,  Dec.  31,  1920 


Assets 
Current  Assets 
Cash  ......$ 

Customers: 

L.  T.  Gray  . 

E.  R.  Mix  .  . 
Notes  Receivable 
Mdse.  Inventory.  3 

650.00 

200.00 
485.00 
740.00 
,100.00  $5 

175 

00 

Liabilities  and  Capital 

Current 

Creditors: 

J.  J.  Watts  .  $  250.00 
W.  R.  Cobb.  .    225.00 

Notes  Payable.  .  1,500.00  $1,975 

00 

L.  J.  Klein,  Capital       4,000 

00 

Fixed  Assets 
Furniture  &  Fixt. 

800 

00 

S5 

975 

00 

$5,975 

00 

Mr.  Newton 

BALANCE  SHEET,  Dec.  31,  1920 


Assets 


Current  Assets 

Cash  ...... 

$  325.00 

Customers: 

C.  B.  Dillon. 

400.00 

E.  R.  Ray  .  . 

490.00 

Notes  Receivable 

450.00 

Mdse.  Inventory 

2,650.00  $4 

815 

00 

Fixed  Assets 

Furn.  &  Fixt..  . 

1 

050 

00 

S5 

365 

00 

Liabilities  and  Capital 
Current 
Creditors: 

F.  F.  Foy  ,  .  $  220.00 

L.  L.  Lee  .  .    545.00 
Notes  Payable.  .    900.00  $1,665.00 


L.  N.  Newton,  capital 


3,700.00 


$5,365.00 

The  agreement  states  that  each  partner  is  to  pay  into  the  business 
enough  cash  to  bring  his  capital  up  to  $5,000.00.  A  new  set  of  books  is  to 
be  opened  for  the  partnership  under  the  firm  name  of  Newton  &  Klein. 

The  procedure  called  for  in  this  case  is: 

1.  Closing  entries  on  the  books  of  Klein. 

2.  Closing  entries  on  the  books  of  Newton. 

3.  The  opening  journal  entries  for  the  new  firm  of  Newton  &  Klein,  creating 
controlling  accounts  for  both  the  accounts  receivable  and  accounts  payable  sub- 
sidiary ledger. 

1.  Entries  Closing  the  Books  of  Mr.  Klein.  The  following  compound 
journal  entry  will  close  the  books  of  Mr.  Klein's  business.  Assets  are 
credited  and  liabilities  and  capital  are  debited : 

Notes  Payable  $1,500.00 

J.  J.  Watts 250.00 

W.  R.  Cobb 225.00 

Mr.  Klein  Capital  4,000.00 

Cash  .  .   $  650.00 

Merchandise 3,100.00 

Furniture 800.00 

Notes  Receivable  740.00 

L.  T.  Gray 200.00 

E.  R.  Mix 485.00 

For  closing  the  books  as  a  result  of  the  transfer 
of  title  of  all  property  and  the  assumption  of 
all  liabilities  by  Newton  &  Klein. 

Assignment  18,  Page  5 


2.  Closing  Entries  on  the  Books  of  Mr.  Newton.  The  following  entries 
will  close  the  books  of  Mr.  Newton: 

Notes  Payable $  900.00 

F.  F.  Foy 220.00 

L.  L.  Lee 545.00 

Mr.  Newton  Capital  3,700.00 

Cash S  325.00 

Merchandise 2,650.00 

Furniture 1,050.00 

Notes  Receivable  450.00 

C.  B.  Dillon 400.00 

E.  R.  Ray 490.00 

For  closing  the  books  as  a  result  of  the  trans- 
fer of  title  of  all  property  and  the  assumption 
of  all  liabilities  by  Newton  &  Kline. 

In  making  these  entries  compound  journal  entries  have  been  used  in 
order  to  save  time  and  space.  Compound  journal  entries  are  those  that 
show  debits  and  credits  affecting  more  than  two  accounts. 

3.  Opening  Entries  for  the  New  Firm,  Newton  &  Klein.  In  making  the 
opening  entries  the  assets  and  liabilities  of  the  two  concerns  will  be  shown 
in  total  as  determined  for  cash: 

Cash  (Klein)  S650.00 

Cash  (Newton)  325.00 

Total $975.00 

The  complete  opening  entry  for  the  journal  is  as  follows: 

Cash $  975.00 

Merchandise  5,750.00 

Furniture  1,850.00 

Notes  Receivable  1,190.00 

Accounts  Receivable  1,575.00 

L.  T.  Gray $  200.00 

E.  R.  Mix 485.00 

E.  R.  Ray 490.00 

C.  B.  Dillon 400.00 

$1,575.00 

Notes  Payable  $2,400.00 

Accounts  Payable  1,240.00 

J.  J.  Watts $  250.00 

W.  R.  Cobb 225.00 

F.  F.  Foy 220.00 

L.  L.  Lee 545.00 

$1,240.00 

Mr.  Klein,  Capital  $4,000.00 

Mr.  Newton,  Capital  3,700.00 

For  entering  the  assets  and  liabilities  of 
the  business,  of  Mr.  Klein  and  of  Mr. 
Newton,  and  creating  new  Capital  Accounts 
for  each  partner. 

Equalizing  the  Partners'  Capital  Accounts.  According  to  the  agree- 
ment of  Mr.  Newton  and  Mr.  Klein,  each  partner  is  supposed  to  pay  in 
enough  cash  to  bring  his  capital  up  to  $5,000.00.    Klein,  therefore,  must 

Assignment  18,  Page  6 


pay  in  $1,000.00  and  Newton  $1,300.00.    When  this  money  is  paid  in,  the 
accounts  will  be  affected  thus: 

Cash $2,300.00 

I.  J.  Klein $1,000.00 

L.  M.  Newton 1,300.00 

For  cash  received  from  partners  to  equalize  their 
Capital  Accounts  according  to  articles  of  agree- 
ment. 

PROCEDURE  FOR  ADJUSTMENTS  BETWEEN  PARTNERS 
After  a  partnership  is  formed,  the  transactions  which  it  has  with  out- 
side parties  are  practically  the  same  as  those  of  an  individual  proprietor. 
Accordingly,  the  partnership  accounts  and  books  for  recording  such  trans- 
actions would  be  the  same  as  for  the  sole  proprietorship.  There  are,  how- 
ever, some  transactions  or  adjustments  within  the  business  and  among 
the  partners  themselves  that  give  rise  to  new  accounts  and  entries,  which 
are  not  required  in  a  sole  proprietorship.  One  of  the  most  important  of 
these  adjustments  is  the  distribution  of  profits  and  losses. 

Distribution  of  Profits  and  Losses.  As  has  already  been  stated,  there 
should  be  some  sort  of  basis  specified  in  the  Articles  of  Agreement  for  the 
distribution  of  net  profits.  If,  however,  no  method  of  distribution  is  agreed 
upon,  the  law  provides  that  profits  shall  be  divided  equally  among  the 
partners,  regardless  of  the  amounts  invested.  This  seems  to  be  a  just  and 
fair  method,  because  some  partners  who  invest  less  money  than  others 
may  contribute  a  larger  amount  of  skill,  executive  ability,  or  financial 
resources,  which  adds  to  the  power  of  the  organization.  For  this  reason 
you  will  find  partnerships  in  which  the  partners  share  profits  equally,  even 
tho  their  investments  are  unequal. 

Distribution  Based  on  Capital  Investment.  If  the  Articles  of  Agree- 
ment specify  that  profits  are  to  be  distributed  to  the  partners  according 
to  their  investment,  it  should  be  clearly  stated  whether  original  invest- 
ment, net  investment,  or  average  investment  is  meant. 

1.  Original  Investment 
If  partner  A  puts  $2,000.00  in  a  firm  at  the  time  of  starting  a  busi- 
ness and  partner  B  puts  in  $1,000.00,  these  amounts  are  considered  their 
original  investment.  If  profits  are  to  be  divided  according  to  original 
investment,  A  will  receive  twice  as  much  profit  as  B.  This  method  of 
distributing  profits  is  satisfactory,  provided  A  and  B  do  not  increase 
their  investments  from  time  to  time,  or  withdraw  part  of  their  original 
capital  for  personal  use.  In  such  a  case,  it  seems  more  fair  to  distribute 
profits  on  the  basis  of  net  investment,  or  average  investment. 

2.  Net  Investment 
Assume  that  A  and  B  started  their  partnership  in  1919,  A's  original 
investment  being  $2,000.00  and  B's  $1,000.00.  Both  partners  made  sev- 
eral additions  to  their  investment  and  on  several  occasions  withdrew  small 
amounts  for  their,  personal  use,  with  the  result  that  on  December  31,  1920, 
their  capital  accounts  showed  the  following  credit  balances: 

A's  Capital     $3,000.00 

B's  Capital      4,000.00 

These  amounts  are  spoken  of  as  their  net  investment. 

Assignment  18,  Page  7 


On  December  31,  1920,  when  profits  are  distributed  to  the  partners, 
how  much  is  given  to  A,  how  much  to  B,  on  the  basis  of  net  investment  ? 

B  has  1/3  more  net  investment  than  A,  therefore  he  will  receive  1/3 
more  profit.  In  other  words,  for  every  $3  that  A  receives  B  will  receive 
$4.  A's  share  is  3/7  and  B's  is  4/7.  Assuming  the  net  profit  to  be 
^2,100.00,  A  will  receive  $900.00  and  B  will  receive  $1,200.00. 

Altho  profits  are  often  distributed  on  the  basis  of  net  investment, 
nevertheless,  this  method  has  the  disadvantage  of  not  considering  the 
length  of  time  the  capital  has  remained  within  the  business.  In  other 
words,  the  numerous  additions  and  withdrawals  of  capital  should  be  con- 
sidered. It  is  not  sufficient  to  consider  merely  the  net  investment;  it  is 
better  to  figure  the  average  investment. 

3.  Average  Investment 

To  illustrate  how  profits  are  distributed  on  the  basis  of  average  invest- 
ments, take  the  following  actual  situation  from  business.  The  amount  of 
capital  contributed  by  each  partner  and  the  length  of  time  it  is  used  in  the 
business  is  determined  on  the  basis  of  dollars  invested  for  one  month. 
This  method  is  called  the  "dollar  month"  basis. 

M.  N.  Overman  and  N.  O.  Preston  formed  a  partnership  on  January  1, 
1920.  Overman  contributed  assets  valued  at  $12,000.00  and  Preston  con- 
tributed cash  to  the  amount  of  $13,000.00.  Overman  made  an  additional 
investment  of  $2,000.00  on  March  1,  and  $3,000.00  on  August  1.  On  June 
1,  Overman  withdrew  $2,000.00  from  the  business.  On  March  1,  Preston 
made  an  additional  investment  of  $2,000.00  and  on  July  1,  $5,000.00.  On 
August  1,  Preston  withdrew  $5,000.00.  The  net  profits  for  the  year  amount 
to  $6,000.00.  Based  on  average  investment  of  the  length  of  time  each  part- 
ner's capital  remained  invested,  what  is  each  partner's  share  of  the  profits  ? 

M.  N.  Overman's  Share 
Step  One — Determine  the  dollar  months  of  investment. 

Additions  to  Capital  Months  in  Business  Dollar  Months 

Jan.  1  .  $12,000.00           12  $144,000.00 

Mar.  1  .    2,000.00          10  20,000.00 

Aug.  1  .    3,000.00           5  15,000.00 


Total $179,000.00 

Less  Withdrawals  from  Capital: 

June  1  .   $2,000.00  7  14,000.00 


Net  Dollar  Months  of  Investment  $165,000.00 

Step  Two — Calculate  the  average  investment. 

$165,000.00-^12  =  $13,750.00,  Overman's  Average  Investment. 

N.  0.  Preston's  Share 
Step  One — Determine  the  dollar  months  of  investment. 

Additions  to  Capital  Months  in  Business  Dollar  Months 

Jan.  1  .  $13,000.00           12  $156,000.00 

Mar.  1  .  2,000.00           10  20.000.00 

July  1  .  5,000.00           6  30,000.00* 

Total $206,000.00 

Less  withdrawal  from  capital: 

Aug.  1  .   $5,000.00  5  25,000.00 


Net  Dollar  Months  of  Investment  $181,000.00 

Assignment  18.  Page  8 


step  Two — Calculate  the  average  investment. 

$181, 000. 00 H- 12  =  $15,083.34,  Preston's  Average  Investment. 

Summary  of  Partners'  Average  Investment. 

Overman's  Average  Investment  $13,750.00 

Preston's  Average  Investment  15,083.34 


$28,833.34 

Each  Partner's  Share  of  Profits. 

(a)  Overman's  share  of  profits  equals:  (b)  Preston's  share  of  profits  equals: 
$13,750.00  $15,083.34 

=  47.7%  =52.3% 

$28,833.34  $28,833.34 

Percentage  of  Net  Profits. 

47.7%  of  $6,000.00  =  $2,862.00  Overman's  share. 
52.3%  of  $6,000.00  =    3,138.00  Preston's  share. 


100% 


$6,000.00  Net  Profit 

Transfer  of  Net  Profits  to  Capital  Accounts. 

$6,000.00 


Profit  and  Loss  (Net  Profit) 
M.  V.  Overman,  Capital  . 
N.  0.  Preston,  Capital  . 


$2,862.00 
3,138.00 


To  distribute  net  profit  to  the  respective  part- 
ner's accounts,  on  the  basis  of  average  invest- 
ment, as  per  Agreement. 

The  following  accounts  show  each  partner's  capital  as  it  stood  on  Jan- 
uary 1,  1921,  after  posting  the  above  journal  entry: 

M.  N.  Overman,  Capital 


June 


Dec. 


31 


Withdrawal 


Net  Worth 


$  2,000 

00 

Jan. 
Mar. 
Aug. 

1 

1 
1 

17,862 

00 

Dec. 
Jan. 

31 

1 

$19,862 

00 

Investment 
Investment 
Investment 
Share  of  Net  Profit 


Net  Worth 


$12,000 

00 

2,000 

00 

3,000 

00 

2,862 

00 

$19,862 

00 
00 

$17,862 

N.  0.  Prkston,  Capital 


Aug. 
Dec. 


Withdrawal 
Net  Worth 


$  5,000 

00 

Jan. 
Mar. 
July 

1 

1 
1 

18,138 

00 

Dec. 
Jan. 

31 

1 

$23,138 

00 

Investment 
Investment 
Investment 
Share  of  Net  Profit 


Net  Worth 


$13,000 
2,000 
5,000 
3,138 


$23,138 


$18,138 


Need  of  Drawing  Accounts  for  Partners.    It  is  essential  that  temporary 
additions  or  withdrawals  of  capital  by  partners  be  recorded  in  Drawing 


Assignment  18,  Page  9 


Accounts,  owing  to  the  fact  that  interest  on  capital  and  drawing  is  calcu- 
lated separately.  Moreover,  partners  are  often  allowed  salaries  which 
they  leave  in  the  business  temporarily,  drawing  on  the  account  as  needed. 

Any  temporary  withdrawals  of  cash  or  other  property  from  the  busi- 
ness should  be  debited  to  the  Drawing  Account  of  the  partner  making  the 
withdrawals.  The  Drawing  Account  is  credited  with  his  salaries  earned 
and  sometimes  with  any  temporary  advances  made  to  the  firm.  At  the 
close  of  a  fiscal  year,  the  balance  of  a  partner's  Drawing  Account  is  closed 
into  his  Capital  Account  unless  otherwise  specified  in  the  articles  of  agree- 
ment. It  should,  of  course,  be  stated  in  the  partnership  agreement  just 
how  much  each  partner  may  be  allowed  to  draw  out  of  the  business  during 
a  given  period. 

If  a  partner  advances  money  to  the  business,  the  loan  may  be  credited 
to  a  partner's  Loan  Account  instead  of  to  his  Drawing  Account,  if  he 
prefers,  and  the  other  partners  approve.  In  such  a  case,  the  Loan  Account 
will  draw  interest  at  the  legal  rate  unless  it  is  otherwise  agreed. 

Salaries  Best  Handled  Thru  Drawing  Accounts.  Where  partners  re- 
ceive salaries,  it  is  presumed  that  they  will  not  permit  them  to  remain  in 
the  business  for  any  great  length  of  time  after  they  are  due  and  payable. 
Accordingly,  no  provision  is  made  in  most  cases  for  allowing  interest  on 
Drawing  Account  balances,  representing  undrawn  salaries.  As  salaries  are 
earned,  an  entry  should  be  made,  either  weekly  or  monthly,  crediting  the 
partner's  Drawing  Account  and  debiting  general  or  administrative  expense, 
as  follows : 

General  (or  Administrative)  Expense  $450.00 

A's  Drawing  a/c $100.00 

B's  Drawing  a/c 200.00 

C's  Drawing  a/c 150.00 

To  credit  partners  with  their  respective  salaries 
for  the  month  of  May. 

Since  the  Drawing  Accounts  have  been  credited  periodically  with  the 
salaries  as  they  are  earned,  the  Drawing  Accounts  are  debited  as  the  part- 
ners receive  cash  for  the  amounts  owing  to  them.  Thus,  if  A  draws  cash, 
$50.00  on  account  of  his  salary,  whether  before  the  end  of  the  month  in 
which  it  is  earned,  or  afterwards,  his  Drawing  Account  is  debited  thru  the 
cash  disbursements  book. 

The  partnership  agreement  should  either  fix  a  limit  to  the  amount  that 
may  be  drawn  by  any  partner  in  anticipation  of  profits  or  make  provision 
for  charging  interest  on  withdrawals  to  prevent  any  partner  from  drawing 
a  large  enough  amount  from  the  business  to  hamper  its  financial  transac- 
tions. 

Interest  on  Capital  and  Drawings.  If  all  partners  in  a  business  in- 
vested the  same  amount  of  capital  and  shared  profits  or  losses  in  propor- 
tion to  their  capital,  there  would  be  no  necessity  for  considering  interest 
on  capital.  Similarly,  if  all  partners  received  equal  salaries  and  withdrew 
the  same  amounts  from  the  business  on  the  same  days  for  personal  use, 
there  would  be  no  necessity  of  charging  partners  with  interest  on  their 
Drawing  Accounts.  Even  with  unequal  salaries  it  would  not  be  necessary 
to  figure  interest  on  Drawing  Accounts  if  the  salaries  were  actually  drawn 
as  earned  instead  of  being  permitted  to  remain  as  credits  to  their  Drawing 
Accounts. 

Assignment  18,  Page  10 


These  ideal  conditions,  however,  are  seldom  found.  It  is  necessary, 
therefore,  that  some  accounting  method  be  devised  to  adjust  the  financial 
affairs  so  that  each  partner  will  receive  his  fair  income  on  the  capital 
actually  invested  or  left  in  the  business,  as  well  as  receiving  his  share  of 
the  profits. 

Since  no  interest  is  allowed  on  capital  of  partners,  unless  so  provided  in 
the  partnership  agreement,  this  point  must  be  determined  by  examining 
the  agreement. 


for 


There  are  two  steps  after  it  is  determined  that  interest  is  so  provided 


1.  Calculate  the  amount  of  interest. 

2.  Determine  the  nature  of  the  entry. 

Calculation  of  Interest  on  Capital.  The  interest  may  be  calculated  in 
accordance  with  the  terms  of  the  agreement,  on  the  basis  of : 

1.  Original  investment. 

2.  Net  investment. 

3.  Average  investment. 

The  last  method  is  the  most  equitable.  When  this  method  is  used,  it 
is  not  necessary  to  calculate  interest  on  drawings  separately,  as  such  draw- 
ings and  the  dates  thereof  are  considered  in  determining  the  average  in- 
vestment. 

The  calculation  of  the  amount  of  interest  on  original  investment  or  net 
investment  presents  no  difficulties,  as  it  is  merely  a  matter  of  a  specific 
amount  at  a  given  rate  for  a  given  time  (usually  one  year). 

Calculating  Interest  on  Average  Investment.  In  calculating  interest  on 
the  average  investment,  if  one  carries  out  every  step  that  might  be  ex- 
pressed, there  may  be  a  great  many  separate  problems  in  interest.  This  is 
especially  true  in  case  a  partner  has  made  many  additions  or  withdrawals 
of  capital  during  the  period.  Each  addition  or  withdrawal  must  be  con- 
sidered separately  from  the  date  it  is  entered  to  the  close  of  the  year. 

To  illustrate,  take  the  following  ledger  accounts  showing  the  balances 
at  the  close  of  a  year  in  which  interest  is  to  be  calculated  on  the  average 
investment  at  6  per  cent. 


J.  E.  Regan,  Capital 


Jan.      ) 
J.  E.  Regan,  Drawing 


$3,000  00 


April 
Nov. 

1 
1 

$200 
100 

00 
00 

Assignment  18,  Page  11 


F.  L.  SuLUVAN,  Capital 


I  Jan.      1 
F.  L.  SuLuvAN,  Drawing 


$3,000 


00 


May 
Nov. 

1 
1 

$100 
100 

00 
00 

C.  E.  MuKPHY,  Capital 


Jan. 

1 

$3,000 

00 

C.  E.  Murphy,  Dbawinq 


April 

1 

$200 

00 

The  calculation  of  interest  on  each  of  these  accounts  is  expressed  as 
follows : 

J.  E.  Regan 

$3,000,  1  year  at  6% _ $180.00 

Less  $200,  nine  months  at  6% $9.00 

100,  two  months  at  6%  ...^ 1.00     10.00 

$170.00 

F.  L.  Sullivan 

$3,000,  1  year  at  6% _ $180.00 

Less  $100,  eight  months  at  6% $4.00 

100,  two  months  at  6% _ 1.00      5.00 

$175.00 

C.  E.  Mlirphy 

$3,000,  1  year  at  6% _ $180.00 

Less  $200,  nine  months  at  6%...- - _ 9.00 

$171.00 

Entries  for  the  Interest  on  Investment.  Having  calculated  the  amount 
of  interest  on  investment,  whether  determined  on  a  basis  of  original,  net, 
or  average  investment,  your  next  step  is  to  enter  it  on  the  books.  There 
are  several  different  methods  of  recording  interest  on  investment,  any  one 
of  them  being  generally  satisfactory. 

Since  interest  on  investment  is  not  an  operation  expense,  it  is  advo- 
cated by  some  accountants  that  an  account  called  "Interest  on  Capital"  be 
charged  and  the  respective  Drawing  Accounts  credited.  Others  claim  that 
interest  on  the  investments  of  partners  is  the  most  equitable  way  of  dis- 
tributing profits  in  order  to  recognize  the  varying  amount  of  capital  risk. 
Accordingly,  interest  allowed  on  capital  is  charged  directly  to  the  Profit 
and  Loss  Account.  By  this  method  there  is  no  chance  to  confuse  the 
charge  with  any  expenses  of  conducting  the  business. 

Assignment  18,  Page  12 


Using  the  latter  method  for  illustrative  purposes,  the  entries  for  re- 
cording interest  allowed  to  Regan,  Sullivan,  and  Murphy  are  as  follows : 

Profit  and  Loss $516.00 

J.  E.  Regan,  Drawing  a/c $170.00 

F.  L.  Sullivan,  Drawing  a/c  175.00 

C  E.  Murphy,  Drawing  a/c  171.00 

The  effect  of  this  entry  on  the  financial  relationships  of  the  partners 
may  be  seen  by  making  an  equal  distribution  of  the  $516.00  charged  to 
Profit  and  Loss.  This  loss  would  be  distributed  equally  among  the  part- 
ners, by  the  following  entry : 

J.  E.  Regan,  Drawing  Account  $172.00 

F.  L.  Sullivan,  Drawing  Account  172.00 

C.  E.  Murphy,  Drawing  Account  172.00 

Profit  and  Loss $516.00 

After  posting  both  the  above  entries  to  the  partners'  Drawing  Accounts, 
the  accounts  would  appear  as  follows: 

J.  E.  Regan,  Drawing 


Profit  and  Loss 


$172  00 


Int.   on  Investment 


$17C  00 


F.  L.  SuLUVAN,  Drawing 


Profit  and  Loss 


$172  OC 


Int.   on  Investment 


$175  00 


C.  E.  MtJRPHY,  Drawing 


Profit  and  Loss 

$172 

00 

Int.  on  Investment 

$17100 

It  appears  that  Regan  loses  $2,  Murphy  loses  $1,  and  Sullivan  gains  $3. 
The  same  net  result  may  be  shown  more  briefly  by  the  following  entry, 
affecting  only  the  drawing  accounts : 

J.  E.  Regan,  Drawing $2.00 

C  E.  Murphy,  Drawing 1.00 

F.  L.  Sullivan,  Drawing $3.00 

Other  Methods  of  Calculating  Interest.  When  the  number  of  entries 
in  a  partner's  Drawing  Account  are  numerous,  the  calculation  of  interest 
becomes  a  rather  laborious  process  if  carried  out  in  detail  as  in  the  pre- 
ceding illustration.  For  this  reason,  some  substitute  methods  are  in  use. 
A  very  common  method  is  the  "dollar  month"  basis,  similar  to  that  dis- 
cussed in  connection  with  the  distribution  of  profits  or  losses.  The  "aver- 
age date"  method  is  another  in  frequent  use,  an  explanation  of  which  will 
be  found  in  any  good  commercial  arithmetic. 

Partnership  Insui-ance  Account.  A  partnership  often  insures  the  lives 
of  the  partners.  It  does  this  because  it  reaHzes  that  the  death  of  a  mem- 
ber of  the  firm  may  cause  considerable  inconvenience  and  expense,  and  in 
some  cases  a  great  loss  to  the  business.  Accordingly,  a  life  insurance 
policy  is  taken  out,  payable  to  the  remaining  partners  upon  the  death  of 
any  one  of  them.  The  policy  may  be  a  blanket  policy,  insuring  all  the 
partners,  or  a  separate  policy  for  each  partner. 


Assignment  18,  Page  13 


In  any  case,  the  premium  of  such  a  policy  is  paid  out  of  the  partnership 
cash.  At  the  end  of  the  third  year — in  some  cases  at  the  end  of  the 
second  year — the  poHcy  has  a  cash  surrender  value  which  is  specifically 
stated  in  the  policy  and  increases  in  value  each  year.  That  is,  if  the 
partnership  should  decide  to  drop  the  policy  at  any  time  after  the  second 
or  third  year,  the  insurance  company  agrees  to  refund  a  certain  amount 
of  cash  on  the  policy. 

The  important  point  to  consider  is  this:  Just  as  soon  as  the  policy 
begins  to  have  a  cash  surrender  value,  this  amount  should  be  brought  on 
the  books  as  an  asset.  The  cash  surrender  value  is  like  an  accounts  receiv- 
able, since  it  is  an  account  due  the  company.  For  the  first  two  or  three 
years,  however,  until  the  policy  has  a  realizable  cash  value,  the  premium 
should  be  charged  off  as  an  ordinary  operating  expense. 

A  Typical  Case.  The  firm  of  Adams  &  Smith  took  out  a  $2,000.00 
policy  on  January  2,  1918,  for  each  of  the  partners.  The  annual  premium 
amounts  to  $120.00. 

When  the  policies  were  taken  out  and  the  first  premiums  were  paid,  the 
following  entry  was  made  in  the  cash  book  and  posted  to  a  Partnership 
Insurance  Expense  Account. 

CASH  DISBURSEMENTS  BOOK 


Date 

L.r. 

Account  to  Be  Debited 

Details 

Totals 

Jan. 

2 

Partnership  Insurance 

$120  00 

Partnership  Insurance  (Expense  Account) 


Jan. 

2 

Cash 

$120 

00 

At  the  end  of  the  year  1919  when  the  books  are  closed,  the  Partnership 
Insurance  Account  is  closed  into  the  Profit  and  Loss  Account,  since  the 
insurance  premiums  have  been  an  expense  for  the  year.  The  premiums 
for  1920  and  1921  are  handled  in  exactly  the  same  way,  namely,  as  general 
or  administrative  expense  for  the  period. 

On  January  2,  1922,  however,  the  policy  has  a  cash  surrender  value  of 
$100.00.  In  other  words,  a  new  asset  has  come  into  existence  and,  there- 
fore, should  be  recognized  on  the  books. 

The  accountant  accordingly  makes  the  following  adjusting  journal 
entry : 

JOURNAL 


1922 
Jan. 

2 

Life  Insurance,  Cash  Value 
Profit  and  Loss 

To  record  the  cash  surrender  value  of  policies  Nos. 
171625-6 

$100 

00 

$100 

00 

Assignment  18,  Page  14 


When  this  debit  is  posted  a  new  asset  account,  entitled  "Life  Insurance, 
Cash  Value"  comes  into  the  books  and  will  be  included  among  current 
assets  on  the  balance  sheet. 

On  January  2,  1923,  when  another  premium  of  $120.00  is  paid,  the 
entry  in  the  cash  book  should  be : 


CASH  DISBURSEMENT  BOOK 

Date 

L.F. 

Accounts  to  Be  Debited 

Details 

Totals 

1923 

Jan. 

2 

Life  Insurance — Cash  Value 
Administrative  Expense 

$90 
30 

00 
00 

An  important  question  arises  here:  "Why  is  this  $120.00  premium  dis- 
tributed, $90.00  to  Life  Insurance  Cash  Value  and  $30.00  to  Administrative 
expense  ?" 

This  distribution  is  made  for  the  following  reason:  The  cash  surren- 
der value  at  the  end  of  1923  will  be  $190.00,  as  stated  in  the  policies.  As 
we  already  have  $100.00  set  up  in  the  Life  Insurance  Cash  Value  Account, 
we  simply  charge  enough  to  the  Asset  Account,  namely  $90.00,  to  bring 
the  balance  up  to  the  proper  amount,  $190.00.  The  balance  of  $30.00 
should  be  charged  off  as  a  regular  expense.  If  the  total  premium  of 
$120.00  were  charged  to  the  Asset  Account,  the  asset  would  be  overstated. 

In  order,  therefore,  to  avoid  overstating  the  Life  Insurance  Cash  Value 
asset,  only  $90.00  is  charged  to  it.  Accountants  are  usually  conservative 
and  rightly  so.  They  hesitate  to  overstate  the  value  of  any  asset.  The 
principle  illustrated  here  is  applicable  to  many  other  accounting  problems, 
and  should  be  thoroly  grasped. 

In  case  one  of  the  partners  dies  while  such  a  policy  is  in  force,  the 
money  received  from  the  insurance  company  will  be  debited  to  Cash. 
Enough  is  credited  to  the  Partnership  Insurance  Account  to  close  it,  and 
the  balance  is  divided  among  the  surviving  partners  on  the  same  basis  as 
profits. 

If  the  insurance  policy  does  not  specify  that  the  money  is  payable  to 
the  surviving  partners,  it  may  be  correctly  considered  as  payable  to  the 
partnership.  Otherwise  the  estate  of  the  deceased  will  share  the  insur- 
ance money  with  the  surviving  partners  as  stated,  in  the  policies.  This, 
however,  is  usually  not  the  intention  at  the  time  of  taking  out  the  policy. 

IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

In  this  Assignment  you  have  become  familiar  with  the  accounting 
procedure  for  partnerships,  especially  on  two  main  points: 

1.  The  Formation 

2.  The  Operation 

When  a  partnership  is  formed,  several  important  facts  must  be  con- 
sidered by  the  accountant: 

Assignment  18,  Page  15 


First — The  contract  or  agreement  (Note  standard  form  in  Figure  1). 

1.  The  amounts  of  cash  or  other  assets  invested. 

2.  The  distribution  of  profits  and  losses. 

3.  Interest  on  investment. 

4.  Interest  on  withdrawals,  etc. 

Second — The  conditions  under  which  the  partnership  is  organized. 

1.  When  each  partner  makes  an  original  investment. 

2.  When  a  partner  is  admitted  to  an  established  business. 

3.  When  two  or  more  proprietorships  form  a  partnership. 
Third — 1.  Closing  entries  on  books  of  concerns  forming  a  partnership. 

2.  Opening  entries  on  books  of  new  partnership. 

When  the  newly  formed  partnership  begins  to  operate,  adjustments 
should  be  made  for  the  following: 

First — Distribution  of  profits  and  losses. 

1.  Based  on  original  investment. 

2.  Based  on  net  investment. 

3.  Based  on  average  investment  (dollar-month  method). 
Second — Use  of  drawing  accounts. 

1.  For  withdrawals. 

2.  Salaries. 

Third — Adjustments  for  interest  on  capital  and  drawings. 

1.  Calculation  of  interest. 

2.  Entry  of  interest  in  the  accounts. 

Fourth — Adjustment  of  the  Partnership  Insurance  Account  to  carry 
the  Cash  Surrender  Value  as  an  asset. 

In  your  next  assignment  you  will  learn  how  a  partnership  is  dissolved, 
and  what  entries  are  necessary  on  the  books.  Special  forms  of  partner- 
ships will  also  be  presented  such  as  Joint  Ventures. 


Assignment  18,  Page  16 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  18 

After  reading  the  assignment  carefully,  prepare  solutions  for  all  the 
following  problems.  The  first  five  problems  give  you  an  opportunity  of 
handling  the  accounts  for  one  firm,  just  as  effectively  as  if  you  were  work- 
ing right  in  their  office. 

1.  Prepare  the  opening  journal  entries  at  the  organization  of  the  new 
firm,  Stone  &  Thomas.  Use  the  data  contained  in  the  Articles  of  Agreement 
as  shown  on  the  next  page  with  this  additional  information :  Mr.  Stone's 
books  showed  accounts  due  him  as  follows:  H.  R.  Smith,  $354.00;  M.  T. 
Krause,  $1,200.00 ;  R.  C.  Mentor,  $2,000.00 ;  B.  C.  Thom,  $310.00.  He  owed 
Diemer  Hardware  Company  $1,000.00;  Brown  Mercantile  Company, 
$800.00;  National  Clothing  Company,  $550.00.  Mr.  Thomas'  books  showed 
accounts  due  as  follows:  Mr.  R.  Blake,  $140.00;  R.  S.  Truax,  $850.00;  B.  M. 
Stein,  $750.00;  B.  A.  Kuper,  $600.00.  These  accounts  were  outstanding: 
A.  M.  Bowen,  $1,000.00;  D.  C.  Coulter,  $150.00;  O.  S.  ElHs,  $50.00. 

2.  Mr.  Stone  receives  his  monthly  allowance  of  $150.00.  In  addition, 
he  withdraws  on  February  15,  $750.00  in  cash  for  his  personal  use.  This 
is  returned  with  interest,  June  1.  Set  up  Mr.  Stone's  Drawing  Account  as 
it  will  appear  on  June  1.    Figure  interest  on  the  exact  number  of  days. 

8.  The  net  profit  of  the  firm.  Stone  &  Thomas,  is  $6,000.00  for  the  year. 
Show  entry  to  apportion  the  net  profit. 

4.  The  Partnership  Insurance  Account  on  the  books  of  A,  B  &  C  has  a 
balance  on  Jan.  1,  1922,  of  $1,360.10.  On  December  31,  1922,  the  cash 
surrender  value  amounts  to  $1,527.60.  The  annual  premium  for  the  year 
1922,  amounting  to  $263.50  is  paid  January  15.  1922. 

1.  How  much  should  be  charged  to  the  Partnership  Insurance 
Account  ? 

2.  How  much  to  the  Administrative  Expense  Account  ? 

5.  Profits  and  losses  are  shared  equally  in  the  partnership  of  A,  B  &  C. 
It  is  found  that  interest  on  the  average  investment  for  the  year  1921  is  as 
follows:  A,  $200.00;  B,  $300.00;  C,  $100.00.  Make  the  necessary  journal 
entries  to  adjust  the  interest,  (a)  When  the  transaction  is  carried  thru 
the  Profit  and  Loss  Account,  (b)  using  the  partners'  drawing  accounts. 


Assignment  18,  Page  17 


AfiTICLES  OF  COPARTKERSKIP  FOR  THE  FIRM  OF  STONE  &  TEOLIAS 

AGREEMENT  OF  COPARTNERSHIP,  entered  into  the  UiA/)Jr  day  of^i.»*«''t^l921, 
by  and  between iw.>?-  jiXi^m.  of  the  city  of  C^Ic^-^^  state  o^  Si£t^n,d*< , 
end  jf  >?.  i^#»»<*«-  of  the  oity  of  Stoc^^       state  of  SMi>,^^*i<^ 

FIRST   The  said  parties  mutually  agree  to  become  partners  imder  the  firm 
nasi.?  oi:T5:fe«  <t«<<ji  fl.^-rtuiA-'    in  the  business  of  .A^J2c^<.*<<^**'^-^<*^'**<^^<2^*'»<<a^^ 
for  a  period  of  lo     years  from  date,  their  place  oir  business  to  be  located 
in  e£<^oe^ ,  i^^c^^t*^. 

SECOND:  To  that  end  and  purpose  <^hju.~hi- SZ^^       has  contributed  <U«JL , 

7i.e:Cey=  f^cL^f^Me.^  Z.OOO.OO    ^2<::<j<»t.^«Zb    Pa.,^4X>4e. ,  a^  M^^tS^ ,  *  ?,Z  ^  O .  O  0 ,  tSUi^cC  .Ttu. 
CZwC^w^KiZ-Xml    C*^tZ^.<jK.CCUC    G^LoA-,  ^  2,(K0.  00,  -TyiuCuL  .    JU^.yi>£*CQUu^  /  ig,  ri  O.  O  0, 
Cicc^M,cvvCi    /U-eJLiv^J^  ^  £,  3H0.OO  ,'?t^^  /Iccjli'ViUMl.,^ /,iOO.OO ,     (7>tA-^t'*'**W--' 

Ox<^o^<yr!Z^    ^ay-^^^i^^-le.  ^  /jZOO .00         to  be  used  and  eEployed  in  coraaon  'between 
them  for  the  support  and  management  of  the  eald  business  to  their  mutual  bene- 
fit and  advantage* 

THIRD:  Said  parties  agree  ^dth  each  other  that  each  shall  devote  his  whole 
time,  attention,  talents,  and  business  capacity  to  the  business  of  the  firm. 

FOURTH:  Neither  of  the  partners  shall  become  indorser  or  security  in  any 
manner  for  any  other  person  ujiless  the  consent  thereto  of  his  copartner  shall 
have  been  first  obtained  in  -wi-iting. 

FIFTH:  There  shall  be  kept  at  all  times  during  the  continuance  of  their  co- 
partnership perfect,  just,  and  true  books  of  accoiont  -^lich  shall  be  accessible 
to  both  partners  at  all  times. 

SIXTH:  The  books  shall  be  balanced  at  the  close  of  business  on  the  thirty- 
first  day  of  ^A:*»»^*'>- in  each  year,  and  the  profits  and  losses  shall  be  shared 
equally  between  said  partners. 

SEVENTH:  Each  of  the  parties  may  draw  from  the  cash  of  the  firm  the  sum  of 
fK^J^u^yuCruoL  •f'^if^  a-^yuiL-  f^   dollars  a  month,  for  his  own  use,  the  same  to  be 
charged  on  account,  and  neither  of  then  shall  take  any  further  s\im  for  his 
separate  use  without  the  consent  of  the  other  in  writing;  any  fiurther  sum  so 
taken  shall  draw  interest  at  the  rate  of  6  per  cent,  and  shall  be  payable  to- 
gether with  the  interest  due,  within  -  GO   -   days  after  notice  in  writing  given 
by  the  other  party. 

EIGTH:  TOien  the  firm  shall  be  dissolved  all  debts  shall  be  paid;  a  true,  just, 
and  final  accotmt  shall  be  made,  and  the  balance  shall  be  divided  eqtially  between 
the  partners* 

Witness  our  hands  and  seals  this  .^iW-  day  of  J!</>t«<t^,  19  ^ /• 

In  presence  ^^"»<  ^\-  ^^CffiL    Seal 


o^  "y^y    ^^-m^SbsI 


r 


Partnebship  Agreement 


Figure  1.    This  form,  in  addition  to  giving  you  a  good  idea  of  the  exact  nature  of  a 

partnership  agreement,  also  contains  facts  and  figures  which  are  necessary  to  the 

solution  of  the  problems  with  this  assignment 

Assignment  18,  Page  18 


Higher  Accountancy 

oi  la 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  19 

PARTNERSHIP  ACCOUNTING- 
DISSOLUTION  PROBLEMS— JOINT  VENTURES 


IT  is  not  amiss  to  point  out  that  the  possession  of  a 
good  ground  work  in  accountancy  is  a  distinct  asset 
of  increasing  importance  for  one  desiring  to  reach  impor- 
tant executive  positions. 

W.  S.  CARPENTER 

Vice-President  and  Treasurer 
E.  I.  DuPont  De  Nemours  &  Co. 


LaSalle  Extension  University 

Chicago 


NHA-19 
12-12 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  cf  the  Ledger 

10.  Coluninization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.le  ExTHN^iinv  I'xivhrsity 


PARTNERSHIP  ACCOUNTING 
DISSOLUTION  PROBLEMS— JOINT  VENTURES 

From  your  study  of  the  preceding  assignment  you  should  now  be 
able  to  handle  the  books  of  a  partnership,  at  least  as  far  as  its  forma- 
tion and  operation  are  concerned. 

But  suppose  that  for  some  reason  or  other  the  firm  is  dissolved. 
Could  you  close  the  partnership's  books  correctly  and  give  an  intelli- 
gent accounting  to  the  partners?  Unless  you  can  do  this  your  knowl- 
edge of  partnership  accounting  is  incomplete.  This  assignment  is  in- 
tended to  give  you  by  way  of  illustration  the  fundamental  accounting 
problems  that  arise  at  the  time  of  dissolution. 

Since  a  partnership  rests  upon  a  contract  between  individuals,  its 
life  is  Hmited.  The  problem  of  dissolution  must  sooner  or  later  be  given 
attention.  Disputes  may  arise,  business  may  be  unprofitable,  partners 
may  die  or  withdraw,  new  partners  may  be  admitted,  or  the  business 
may  find  it  desirable  to  incorporate  and  acquire  more  capital;  any  one 
of  these  conditions  may  cause  the  partnership  to  be  reorganized  or 
cease  to  exist. 

For  example,  some  of  the  large  businesses  of  to-day  originally  started 
as  partnerships,  but  because  of  the  need  for  additional  capital  were  re- 
organized or  sold.  This  was  true  in  the  case  of  the  Cluett  Peabody 
Company,  which  operated  as  a  partnership  until  1901.  The  Hart  Shaffner 
Marx  company  also  developed  out  of  a  partnership.  Kaufman's  Depart- 
ment Stores,  Inc.  of  New  York  grew  out  of  an  original  partnership. 
Many  other  similar  cases  might  be  cited. 

Perhaps  in  your  own  community  you  v/ill  find  partnerships  that  have 
been  reorganized  or  discontinued  for  one  reason  or  another.  In  either 
case  a  final  settlement  was  necessary  so  that  each  partner  might  re- 
ceive his  proper  share. 

To  handle  properly  the  problems  that  usually  arise  in  case  of  dis- 
solution the  accountant  should  first  of  all  consider  three  things: 

1.  The  causes  of  the  dissolution. 

2.  The  provisions  for  dissolution   specified   in   the   partnership 
agreement. 

3.  The  requirements  of  the  partnership  law. 

Causes  of  Dissolution.  To  determine  the  cause  of  the  dissolution  each 
situation  must  be  analyzed.  In  one  case  the  partners  may  agree  to  dis- 
solve. That  is  a  voluntary  dissolution.  In  another  case  the  creditors 
may  force  a  dissolution.  Such  a  case  would  be  called  an  involuntary 
dissolution.  Ordinarily  one  or  more  of  the  following  conditions  will 
cause  a  partnership  to  dissolve: 

NHA-19 


VOLUNTARY 

1.  Withdrawal  of  a  partner. 

2.  Sale  of  a  partnership  or  incorporation. 

3.  Mutual  agreement  of  partners. 

(a)  Agreement  at  time  of  organization  as  to  time 
partnership  is  to  continue. 

(b)  Mutual  disagreement. 

(c)  Admission  of  a  new  partner. 

INVOLUNTARY 

4.  Death  of  a  partner. 

5.  Bankruptcy  of  partnership  or  bankruptcy  of  one  of  the 
partners. 

Provisions  for  Dissolution  in  the  Terms  of  the  Agreement.  The  sec- 
ond important  thing  to  consider  is  the  partnership  agreement.  This 
agreement  usually  makes  some  provision  for  dissolution,  in  some  cases 
more  fully  than  in  others.  Among  other  things  it  may  include  the  fol- 
lowing provisions: 

1.  Time  at  which  the  partnership  is  to  terminate. 

2.  How  the  assets  shall  be  disposed  of  upon  dissolution. 

3.  What  procedure  should  be  followed  when  one  of  the  partners 
dies  or  withdraws:  i.e.,  shall  the  business  continue  after  dis- 
solution or  shall  it  cease. 

4.  What  value  should  be  placed  on  goodwill  upon  the  death  or 
withdrawal  of  a  partner? 

The  more  specific  the  agreement  is  on  such  points,  the  less  difficulty 
will  the  accountant  have  in  making  the  final  adjusting  entries. 

Requirements  of  Partnership  Law.  The  third  element  that  enters 
into  dissolution  problems,  especially  in  the  case  of  liquidation,  is  the  re- 
quirements of  the  law  as  to  who  has  first  claim  on  the  assets.  The  law 
usually  prescribes  that  claims  on  the  partnership  should  be  satisfied, 
in  the  following  order: 

1.  Creditors'  claims  to  be  paid  first. 

2.  Advances  or  loans  by  partners  to  be  paid  next. 

3.  Capital  repaid  to  partners. 

4.  Remaining  assets  divided  among  partners  in  the  way  profits 
and  losses  are  divided. 

Since  the  adjusting  entries  must  conform  to  these  legal  require- 
ments, it  is  desirable  that  the  accountant  have  a  reasonably  good  knowl- 
edge of  partnership  law. 

ENTPwIES  FOR  DISSOLUTION  OF  PARTNERSHIPS 

Naturally,  every  partnership  dissolution  presents  different  conditions; 
in  other  words,  a  different  problem.  From  an  accounting  viewpoint, 
however,  there  are  certain  features  that  are  more  or  less  common  to  all 

Assignment  19,  Page  2 


dissolutions.    As  a  result,  partnership  dissolutions  can  be  classified  into 
two  general  groups: 

I.     Cases  in  which  the  business  is  continued  after  dissolution. 
II.     Cases  in  which  the  business  is  liquidated. 

The  dissolution  of  a  partnership,  therefore,  does  not  necessarily  mean 
that  the  business  conducted  by  it  is  entirely  suspended  or  closed  out. 
For  example,  in  cases  under  I,  the  business  is  continued,  but  the  owner- 
ship is  slightly  or  completely  changed.  In  fact,  this  is  the  case  in  the 
majority  of  partnership  dissolutions. 

First,  we  shall  consider  those  dissolutions  in  which  liquidation  does 
not  take  place,  which  belong  to  group  one. 

1.    Dissolutions  Without  Liquidation 

A  partnership  may  dissolve  without  liquidation  under  the  following 
conditions : 

1.  When  a  partner  withdraws  or  dies 

2.  When  a  new  partner  is  admitted. 

3.  When  a  partnership  is  sold. 

4.  When  a  partnership  is  incorporated. 

For  each  of  these  cases  we  shall  present  an  illustration. 

1.  Partnership  Dissolved  by  the  Withdrawal  of  a  Partner.  Under 
this  situation  one  or  more  partners  may  withdraw,  the  others  remain, 
and,  reorganizing  into  a  new  partnership,  proceed  with  the  business  op- 
erations, as  was  the  case  in  the  following  situation. 

The  partnership  of  A.  Rainey  &  Sons  is  dissolved  because  the  senior 
partner,  A.  Rainey,  withdraws  on  June  30,  1922.  The  two  sons,  Ben  and 
Carl,  form  a  new  partnership,  conducting  the  business  under  the  name 
Rainey  Brothers.  Ben  and  Carl  each  invest  enough  cash  in  the  new 
partnership  to  have  an  equal  net  share  in  the  concern,  which  is  to  be 
capitalized  at  $8,000.00.  The  balance  sheet  of  A.  Rainey  &  Sons,  on 
June  30,  1922,  was  as  follows: 

A.  RAINEY  &  SONS 
Balance  Sheet,  June  30,  1922 


Assets 

Cash $  550.00 

Accounts  Receivable  2,500.00 

Notes  Receivable 2,200.00 

Merchandise  Inventory  2,850.00 

Building 2,000.00 

Land 1,000.00 


$11,100.00 


Liabilities  and  Capital 
Accounts  Payable  ...         $  1,200.00 


A.  Rainey,  Capital  .  .$4,800.00 

plus  Drawing  a/c  .  .   900  00 

Ben  Rainey,  Capital.  .$2,400.00 

less  Drawing  a/c  .  .   320.00 

Carl  Rainey,  Capital  .$2,400.00 

less  Drawing  a/c  .  .   280.00 


5,700.00 


2  080.00 


2.120  00 


$11,100.00 


Assignment  19,  Page  3 


Since  this  business  is  to  be  continued,  the  same  set  of  books  will  be 
used.  Two  of  the  three  partners'  Capital  Accounts  will  remain  on  the 
books.  You  will  note  that  A.  Rainey's  Drawing  Account  has  a  credit 
balance,  probably  because  he  left  a  part  of  his  share  of  the  profits  in  the 
business.  The  capital  of  the  two  sons,  however,  has  been  drawn  against, 
as  shown  by  the  debit  balances  in  their  Drawing  Accounts. 

The  necessary  steps  are: 

1.  Close  all  the  drawing  accounts. 

2.  Close  A.  Rainey's  Capital  Account. 

3.  Show  the  additional  cash  invested  by  the  remaining 
partners. 

June  30,  1922  A.  Rainey,  Drawing  _ $    900.00 

A.   Rainey,   Capital   $    900.00 

Closing  Drawing  into  Capital  Account 

Ben    Rainey,    Capital $    320.00 

Ben    Rainey,    Drawing „ $    320.00 

Closing  Drawing  into  Capital  Account 

Carl    Rainey,    Capital $    280.00 

Carl    Rainey,    Drawing $    280.00 

Closing  Drawing  into  Capital  Account 

A.  Rainey,  Capital $5,700.00 

Notes  Payable  $5,700.00 

Closing  A.  Rainey's  Capital  Account  as 
he  withdraws  from  the  business  and  is 
paid  for  his  interest  by  a  note  of  the 
two  sons. 

Cash  $3,800.00 

Ben   Rainey,   Capital _ „ $1,920.00 

Carl   Rainey,  Capital 1,880.00 

Ben  and  Carl  contributing  cash,  as  addi- 
tional investment,  to  bring  total  to 
$8,000.00,  each  having  V2  interest. 

If  A.  Rainey  had  been  paid  in  cash  or  some  other  form  of  property, 
such  property  account  would  have  been  credited  instead  of  the  Notes 
Payable  Account. 

After  the  dissolution  of  the  old  partnership  and  the  formation  of  the 
new  firm  the  balance  sheet  of  Rainey  Brothers  would  appear  as  follows: 


RAINEY  BROTHERS 
Balance  Sheet,  July  1,  1922 


Assets 

Cash $  4,350.00 

Accounts  Receivable  2,500.00 

Notes  Receivable 2,200.00 

Merchandise  Inventory  2,850.00 

Building 2,000.00 

Land 1,000.00 


$14,900.00 


Liabilities  and  Capital 

Accounts  Payable $  1,200.00 

Notes  Payable  5,700.00 

Ben  Rainey,  Capital  4,000.00 

Carl  Rainey,  Canital 4,000.00 


$14,900.00 


Assignment  19,  Page  4 


The  same  procedure  would  be  followed  should  a  partner  die.  In 
such  a  case,  the  old  partners  must  make  settlement  with  the  estate  of 
the  deceased. 

2.  Partnership  Dissolved  by  Admitting  New  Partner.  Before  a  new 
partner  is  admitted  the  old  partnership  must  be  dissolved.  In  winding 
up  the  affairs  of  the  old  partnership  the  same  books  will  usually  be 
retained  for  the  new  partnership,  since  the  business  is  to  be  continued. 
Adjustments,  however,  must  be  made  in  the  Capital  Accounts  of  the 
partners  that  remain  in  the  business,  and  new  Capital  Accounts  set  up 
for  the  incoming  partners  in  accordance  with  the  new  partnership  agree- 
ment. 

When  a  person  is  admitted  into  a  going  partnership,  several  possi- 
bilities may  arise,  depending  on  the  agreement. 

(a)  The  new  partner  may  buy  an  interest  in  the  business  by  paying  the  partners 
on  the  side, 

(b)  The  new  partner  may  buy  an  interest  in  the  business  by  investing  money  in 
the  business. 

(c)  The  new  partner  may  buy  an  interest  in  the  profits  of  the  business. 

(d)  The  new  partner  may  buy  an  interest  in  the  goodwill  of  the  concern. 

Problem  (a).  Buying  an  Interest  in  a  Partnership  by  Paying  Partners 
on  the  Side.  White  and  Smith  have  conducted  a  partnership  for  several 
years.    On  December  31,  1921,  their  balance  sheet  appeared  as  follows: 


WHITE  &  SMITH 
Balance  Sheet,  Dec.  31,  1921 


Sundry  Assets 

8100,000.00 

White,  Capital  .... 

$50,000.00 

Smith,  Capital  .... 

50,000.00 

$100,000.00 

$100,000.00 

I 


The  firm  offers  to  sell  Brown  a  14  interest  in  the  partnership  for 
$50,000.00,  to  be  paid  on  the  side,  1/2  to  White  and  i/^  to  Smith.  Brown 
accepts  the  offer.  How  would  the  Capital  Accounts  appear  after  his 
admission  ? 

Solution:  Since  Brown  pays  the  $50,000.00  to  the  partners  them- 
selves and  not  into  the  business,  no  entry  is  made  for  the  cash  received. 
Therefore,  the  assets  will  be  no  larger  after  the  new  partner  is  admitted 
than  before,  as  shown  by  the  following  balance  sheet: 

WHITE,  SMITH  &  BROWN 
Balance  Sheet,  January  1,  1921 


Sundry  Assets $100,000.00 


$100,000.00 


White,  Capital $  37,500.00 

Smith,  Capital  37,500.00 

Brown,  Capital  25,000.00 


$100,000.00 


I 


Assignment  19,  Page  5 


As  stated,  the  agreement  provides  that  Brown  is  to  have  a  14  interest 
in  the  business.  The  total  capital  is  $100,000.00,  hence  Brown  is  credited 
with  $25,000.00.  The  remaining  $75,000.00  capital  is  equally  divided 
between  White  and  Smith,  as  shown  by  the  adjusting  entry: 

December  31, 1921  White,  Capital  $12,500.00 

Smith,  Capital  12,500.00 

Brown,  Capital  $25,000.00 

To  record  Brown's  admission  into  the 
partnership  and  adjust  old  partners' 
capital  according  to  the   agreement. 

Some  accountants  prefer  to  set  up  goodwill  as  an  asset  on  the  part- 
nership books  before  closing.  The  reason  they  give  is  that  the  sale  of 
a  i/t  interest  for  $50,000.00  is  equivalent  to  valuing  the  new  business  at 
$200,000.00.  In  other  words.  White  and  Smith  are  selling  something 
besides  tangible  assets;  namely,  goodwill.  The  old  capital  was  $100- 
000.00;  the  new  capital  is  to  be  $200,000.00.  This  excess  of  $100,000.00 
would,  according  to  their  method,  be  brought  on  the  partnership  books, 
before  dissolution,  as  an  asset,  by  the  following  entry: 

December  31, 1921  Goodwill  $100,000.00 

White,  Capital  $50,000.00 

Smith,  Capital 50,000.00 


To     divide    the    goodwill    equally 
according  to  the  agreement. 


The  chief  objection  to  this  method  is  that  the  assets  are  inflated  from 
$100,000.00  to  $200,000.00  by  arbitrarily  setting  up  goodwill.  If  the 
goodwill  represents  a  real  value — such  as  the  name  of  a  business,  an 
established  trade,  or  other  advantages — then  there  would  be  no  objection 
to  setting  up  goodwill.  Ordinarily,  however,  goodwill  should  not  be  set 
up  on  the  books  as  an  asset  unless  it  represents  the  purchase  of  some 
such  intangible  value.    Such  is  not  the  case  in  the  original  partnership. 

The  situation  here  is:  White  and  Smith  sell  1/4  interest  in  the  busi- 
ness, $25,000.00  worth  of  capital  for  $50,000.00,  none  of  which  is  brought 
into  the  business.  Wliite  and  Smith  each  receive  $25,000.00  cash.  The 
investment  in  the  business  after  the  new  partner  is  admitted  is  exactly 
what  it  was  before,  and  should  so  appear  on  the  balance  sheet. 

Problem  (b).  Buying  a  Share  in  a  Partnership  by  Making  an  Invest- 
ment. Suppose  that  Brown,  in  the  problem  given  above,  paid  his 
$50,000.00  into  the  business  instead  of  to  the  partners  individually.  How 
would  the  Capital  Accounts  appear  ? 

Solution:    The  dissolution  entries  will  be  made  as  follows: 

December  31, 1921  Cash    _ $50,000.00 

Brown,  Capital  $50,000.00 

To     record     investment     by     Brown. 

^~  Brown,  Capital $12,500.00 

White,  Capital $6,250.00 

Smith,  Capital 6,250.00 

To  adjust  the  Capital  Accounts  so  that 
Brown  will  have  Vi  interest  in  the 
business. 

Assignment  19,  page  6 


These  adjusting  entries  when  posted  will  cause  the  balance  sheet  of 
the  new  firm  to  appear  thus: 


WHITE,  SMITH  &  BROWN 
Balance  Sheet,  December  31,  1921 


Sundry  Assets $100,000.00 

Cash 50,000.00 


$150,000.00 


White,  Capital $  56,250.00 

Smith,  Capital  56,250.00 

Brown,  Capital  37,500.00 


$150,000.00 


Note  how  this  problem  differs  from  problem  (a).  In  (a)  the  new 
partner  buys  an  interest  in  the  business  without  making  an  investment 
in  the  business.  In  (b)  the  partner  buys  an  interest  in  the  business  by 
contributing  additional  investment. 

Problem  (c).  Buying  an  Interest  in  the  Profits.  Assume  that  Brown, 
of  our  problem,  by  investing  his  $50,000.00  in  the  business,  is  to  receive 
merely  a  1/4  interest  in  the  profits.  How  would  the  Capital  Accounts 
appear? 


The  following  entry  would  be  necessary: 

December  31, 1921  Cash    

Brown,  Capital  


.$50,000.00 


$50,000.00 
To  record  Brown's  Capital. 

The  balance  sheet  of  the  new  firm  now  stands  as  follows: 


WHITE,  SMITH  &  BROWN 
Balance  Sheet,  December  31,  1921 


Sundry  Assets 

Cash 

$100,000.00 

50,000.00 

White,  Capital   .... 

$  50,000  00 

Smith,  Capital    .... 

50,000.00 

Brown,   Capital   .... 

50,000.00 

$150,000.00 

$150,000.00 

Thus  Brown,  by  paying  in  $50,000.00,  is  to  receive  a  1/4  interest  in  the 
profits.  The  other  two  partners  will  receive  the  remaining  %  of  the 
profits,  or  %  each. 

Brown,  however,  holds  a  1/3  interest  in  the  firm's  assets,  since  he  is 
credited  with  $50,000.00.    Distinguish  clearly  between  the  two  ratios: 


Profit  and  Loss 

Interest 

Sharing  Ratio 

in  Assets 

\^Tiite 

% 

'A 

Smith 

% 

Vz 

Brown 

% 

Vs 

Problem  (d).  Buying  an  Interest  in  the  GoodwiH.  Alston  and  Baker 
are  partners,  sharing  profits  anxi  losses  equally.  Alston  invested 
$15,000.00  and  Baker  $10,000.00.     On  December  31,  1921,  Coleman  was 


Assignment  19,  Page  7 


asked  to  join  the  partnership,  because  of  his  credit  standing.  He  was  too 
busy  to  give  much  of  his  time,  so  he  came  in  on  the  understanding  that 
he  invest  $3,000.00  and  receive  a  1/3  interest  in  the  goodwill.  This  prac- 
tically meant  that  he  v/ould  share  in  the  profits,  and  in  case  of  dissolu- 
tion his  claim  would  be  limited  to  the  profits  that  he  would  have  left  in 
the  business.  In  other  words,  his  investment  would  not  count  in  case 
of  dissolution.  How  would  Coleman's  investment  of  $3,000.00  be  handled 
on  the  books,  and  how  would  the  Capital  Accounts  stand  after  he  was 
admitted  ? 

Solution:    The  following  adjusting  entries  will  be  made  to  show  the 
facts: 

December  31, 1921  Cash    _ $3,000.00 

Coleman,   Capital   $3,000.00 

To  record  Coleman's  investment. 

Coleman,  Capital  _ $3,000.00 

Alston,  Capital  $1,500.00 

Baker,  Capital 1,500.00 

To  record  the  profit  from  the  sale  of 
y^   interest  to  Coleman. 

After  these  entries  are  posted  the  Capital  Accounts  will  appear  thus: 


Alston 

Baker 

Coleman 

Investment 

$15,000.00 
1,500.00 

$10,000.00 
1,500.00 

$3,000.00 

Goodwill  sale  

Investment  distributed 

Capital  Account  Balances 

$16,500.00 

$11,500.00 

$3,000.00 
3,000.00 

$16,500.00 

$11,500.00 

The  point  here  is  that  the  Capital  Account  balances  are  unequal;  in 
fact,  Coleman  has  nothing  to  his  credit,  but,  even  so,  the  three  partners 
share  profits  and  losses  equally. 

3.  When  a  Partnership  Is  Sold.  Now  take  the  case  of  a  partnership 
sale.    A  partnership  may  be  sold  under  three  conditions: 

(a)  For  an  amount  exactly  equal  to  its  net  worth 

(b)  For  more  than  its  net  worth. 

(c)  For  less  than  its  net  worth. 

(a)  First  we  shall  consider  the  case  of  a  partnership  that  is  sold 
exactly  for  its  net  worth.  Assume  that  on  December  31,  1921,  the  firm 
of  Blackstone  &  Whitemore  sells  its  business  to  the  Crane  Tool  Works  for 
$150,000.00,  cash  to  be  paid  on  January  31,  1922.  The  partnership's 
balance  sheet  appears  as  follows: 


Assig^nment  19.  Page  8 


BLACKSTONE  &  WHITEMORE 
Balance  Sheet,  December  31,  1921 


Assets  

$675,000.00 

Liabilities  .... 
Blackstone,  Capital$120,000.00 
Less  Drawing.  .  .  .  20,000.00 

$525,000.00 
100,000.00 

50,000.00 

Whitemore,  Capital. $  80,000.00 
Less  Drawing.  .  .  .  30,000.00 

$675,000.00 

$675,000.00 

Solution:     First  of  all,  we  will  determine  the  net  worth. 
Second,  we  will  close  the  accounts  of  the  partnership. 
The  net  worth  here  is  determined  thus: 
Assets,  $675,000.00— Liabilities,  $525,000.00  =  Net  Worth,  $150,000.00 
The  closing  entries  are: 


December  31, 1921  Blackstone,  Capital  $  20,000.00 

Blackstone,  Drawing  Account 

To  close  Blackstone's  Drawing  Ac- 
count into  his  Capital  Account. 


$  20,000.00 


Whitemore,  Capital...- $  30,000.00 

Whitemore,  Drawing  Account $  30,000.00 

To  close  Whitmore's  Drawing  Ac- 
count into  his  Capital  Account. 


Crane   Tool    Works   $675,000.00 

Sundry  Assets  $675,000.00 

Charging  vendee  with  assets   sold 
and  closing  the  asset  accounts. 


January  81,  1922 


Sundry  Liabilities  $525,000.00 

Crane  Tool  Works  „...  $525,000.00 

Crediting  vendee  with  the  liabili- 
ties assumed  by  them  and  closing 
the  liability   accounts. 

Cash   - - $150,000.00 

Crane  Tool  Works $150,000.00 

Closing  vendee's  account  as  a  result 
of    their    turning    over    the    cash. 


January  31,  1922     Blackstone,  Capital  _ _ $100,000.00 

Whitemore,    Capital   50,000.00 

Cash  - $150,000.00 

To    divide    the    cash    between    the 
partners  according  to  their  invest- 
ment. 

The  closing  entries  for  the  sale  of  a  partnership  may  be  briefly  thus 
summarized  from  the  above  illustration: 

1.    Close  partners'  Drawing  Accounts  into  their  Capital  Accounts. 


Assignment  19,  Page  9 


2.  Close  the  asset  and  liability  accounts  into  an  account  with  the  vendee  (the 
buyer). 

(a)  Debit  vendee  with  assets — credit  asset  accounts. 

(b)  Credit  vendee  with  liabilities — debit  liability  accounts. 

3.  Close  Vendee's  account  when  cash  is  received. 

(a)  Debit  Cash. 

(b)  Credit  vendee. 

4.  Close  the  Cash  Account  and  the  Partners'  Capital  Accounts,  when  cash  is  turned 
over  to  partners. 

(a)  Debit  Capital  Accounts. 

(b)  Credit  Cash. 

(b)  The  second  case  to  be  considered  under  a  partnership  sale  as- 
sumes that  a  partnership  is  sold  for  more  than  its  net  worth.  Take  for 
illustration  the  same  problem  which  was  considered  under  (a),  with 
some  of  the  facts  changed  to  read  thus: 

The  Crane  Tool  Works  pays  the  firm  of  Blackstone  &  Whitemore  $160,- 
000.00  instead  of  $150,000.00.  In  other  words,  the  vendee  (the  buyer) 
pays  $10,000.00  more  than  the  net  worth.  This  excess  represents  a  cap- 
ital profit  called  "Goodwill,"  which  must  be  credited  to  the  partners'  Cap- 
ital Accounts.  How  much  each  partner  is  to  receive  will  depend  upon 
how  they  have  agreed  to  share  profits.  In  our  problem  it  is  assumed 
that  the  partners  share  profits  equally. 

Here,  again,  there  are  two  ways  of  handling  this  profit. 

1.  Consider  the  excess  of  selling  price  over  net  worth  merely  as  a  profit. 

2.  Set  up  the  excess  or  goodwill  as  an  asset  on  the  partnership  books. 

Method  1.  Using  this  method  we  will  set  up  a  Realization  and  Liqui- 
dation Account  and  make  the  following  entries: 

December  31,1921  Realization  and  Liquidation $675,000.00 

Sundry  Assets  (closed  as  separate 

accounts)  $675,000.00 

To  close  the  assets. 

Sundry  Liabilities  (closed  as  sepa- 
rate accounts)   _ $525,000.00 

Realization  and  Liquidation  $525,000.00 

To  close  the  liabilities. 

Crane  Tool  Works  $160,000.00 

Realization  and  Liquidation  $160,000.00 

To  set  up  an  account  with  the 
vendee. 

Realization  and  Liquidation  $  10,000.00 

Blackstone,   Capital   „ $     5,000.00 

Whitemore,   Capital   ..._ _ 5,000.00 

To  distribute  the  profit  equally  and 
close  the  Realization  and  Liquida- 
tion Account. 

Assignment  19,  Page  10 


After  posting  the  above  entries  and  closing  the  Drawing  Accounts, 
we  will  have  the  following  accounts: 

Realization  and   Liquidation 


1921 
Dec. 


31 


Assets 

Balance  Carried  to 
Capital 


$675,000 
10,000 


S685,000 


1921 
Dec. 


31 


Liabilities 
Crane  Tool  Works 


$525,000 
160,000 


$685,000 


00 


Blackstone,  Capital 


1921 

Dec. 


31 


Drawing 


S  20,000 


00 


1921 
Dec. 


31 


Investment 
Profit  on  Sale 


$120,000 
5,000 


Whitemore,  Capital 


1921 
Dec. 


31 


Drawing 


S  30,000 


00 


1921 

Dec. 


31 


Investment 
Profit  on  Sale 


$  80,000 
5,000 


Crane  Tool  Works 


1921 
Dec. 

31 

Realization  and 

Liquidation 

$160,000 

00 

1921 

Three  of  the  above  accounts,  the  two  Capital  Accounts  and  the  ven- 
dee's account,  will  remain  open  until  the  cash  is  received  from  the  Crane 
Tool  Works,  January  31,  1922.  Then  the  following  debits  and  credits 
will  be  made,  and  the  accounts  on  the  partnership  ledger  are  closed. 

January  31, 1922  Blackstone   Capital   $105,000.00 

Whitemore,   Capital   _ 55,000.00 

Crane  Tool  Works  $160,000.00 

To  record  payment  by  vendee,  and 
distribution  of  assets  to  partners. 

On  the  books  of  the  Crane  Tool  Works  the  $10,000.00  excess  of  pur- 
chase price  over  net  worth  is  set  up  as  goodwill,  which  represents  an  asset. 


Assigrnment  19,  Page  11 


This  is  proper  because  $10,000.00  has  been  invested  and  this  investment 
represents  an  asset. 

Method  2.     The  $10,000.00  profit  may  be  handled  in  another  way  on 
the  partnership  books;  namely,  by  setting  it  up  as  an  asset  before  closing, 
thus: 
December  31, 1921  Goodwill  _ - $10,000.00 


Blackstone,   Capital 
Whitemore,  Capital 


$5,000.00 
5,000.00 


To  set  up  goodwill  as  an  asset. 

The  other  closing  entries  are  not  given  here  because  they  would  be  the 
same  as  mentioned  above.  Method  2  is  not  approved  by  some  account- 
ants, for  the  reason  that  goodwill  does  not  represent  an  actual  invest- 
ment, hence  it  should  not  be  set  up  as  an  asset.  It  is  merely  a  profit  to 
the  selling  partnership  and  should  be  so  handled.  To  the  Crane  Tool 
Works,  however,  it  does  represent  an  investment  and  should  properly 
appear  among  their  assets.  They  have  purchased  the  goodwill  by  invest- 
ing $10,000.00. 

(c)  Now  take  the  third  case ;  namely,  when  a  partnership  is  sold  for 
less  than  its  net  worth.  If  Blackstone  and  Whitemore  sell  their  business 
to  the  Crane  Tool  Works  for  $140,000.00  they  will  suffer  a  capital  loss 
of  $10,000.00.  The  situation  here  is  just  the  opposite  of  the  situation 
under  (b). 

The  loss  is  charged  equally  against  the  partners'  capital  thus: 

December  31, 1921  Blackstone,    Capital   $5,000.00 

Whitemore,   Capital   5,000.00 

Realization  and  Liquidation  $10,000.00 

To  record  capital  loss  and  close  Eeal- 
ization   and   Liquidation   Account. 

4.  Dissolution  of  Partnership  for  Purpose  of  Incorporating.  When 
a  partnership  needs  more  capital  or  when  the  partners  wish  to  be  relieved 
from  the  personal  liability  in  connection  with  a  growing  business  they 
usually  decide  to  change  their  partnership  into  a  corporation. 

When  this  situation  arises,  the  accountant  has  two  things  to  do: 

1.  Close  the  books  of  the  partnership. 

2.  Open  the  books  for  the  corporation. 

Problem:  Knight,  Dickson,  and  Rayson  conduct  a  partnership.  They 
share  profits  and  losses  in  proportion  to  their  original  investment.  On 
June  30,  1922,  they  decide  to  incorporate.  Their  balance  sheet  of  this 
date  was  as  follows: 

KNIGHT,  DICKSON  &  RAYSON 
Balance  Sheet,  June  30,  1922 


Sundry  Assets $200,000.00 


$200,000.00 


Sundry  Liabilities $  40,000.00 

Knight,  Capital 80,000.00 

Dickson,  Capital  50,000  00 

Rayson,  Capital 30,000.00 


$200,000.00 


Assignment  19,  Page  12 


The  new  corporation  is  to  be  called  "Knight  &  Company."  It  is  to 
have  an  authorized  capital  stock  of  $200,000.00,  with  a  par  value  of 
$100.00  per  share.  All  this  stock  is  to  be  issued  and  divided  among  the 
partners  in  final  settlement  for  their  interests  in  the  partnership. 

Solution:     The  solution  of  this  problem  requires: 

1.  Closing  the  partnership's  books. 

2.  Opening  the  corporation's  books. 

Entries  to  close  the  partnership's  books. 

June  30,  1922  Knight   &  Company  $200,000.00 

Assets $200,000.00 

To  close  the  asset  accounts. 

Liabilities    ..._ $  40,000.00 

Knight  &  Company  _ $  40,000.00 

To   close   the   liabilities. 

Knight  &  Company  Stock $200,000.00 

Knight  &  Company  $160,000.00 

Capital   Profit   or   Goodwill — Ex- 
cess over  net  worth 40,000.00 

To  record  transfer  of  stock  to  part- 
nership. 

Capital  Profit  $  40,000.00 

Knight,    Capital,   8/16 $  20,000.00 

Dickson,  Capital,  5/16 12,500.00 

Eayson,   Capital,   3/16 7,500.00 

To  distribute  capital  profit  accord- 
ing to  investment. 

Knight  $100,000.00 

Dickson _ 62,500.00 

Ravson  37,500.00 

Capital  Stock  $200,000.00 

To  show  the  distribution  of  capital 
stock  among  the  partners. 

The  entries  that  would  be  made  to  open  the  corporation's  books  are 
not  given  here,  as  you  have  not  had  entries  for  corporations.  These  are 
reserved  for  the  next  assignment. 

11.     DISSOLUTIONS  WITH  LIQUIDATION 

In  the  problems  used  thus  far,  the  partnership  business  continues 
the  same  as  before,  only  under  new  management.  When,  however,  a 
partnership  dissolves,  and  the  business  is  discontinued,  we  have  the  addi- 
tional problem  of  liquidation. 

Partners  may  at  any  time  agree  to  dissolve  and  liquidate.  In  fact 
the  time  for  dissolution  may  be  stated  in  the  terms  of  agreement,  or 
they  may  find  that  their  business  is  unprofitable.  They  may  be  unable 
to  agree  further,  their  business  may  become  illegal,  or  they  may  find  it 
desirable  to  take  the  money  they  have  invested  in  the  partnership  and 

Assignment  19,  Page  13 


put  it  into  some  more  profitable  enterprise.     In  any  case  liquidation  is 
necessary. 

Such  a  dissolution,  whether  voluntary  or  involuntary,  is  handled  by 
the  following  four  steps: 

1.  Closing  the  books  and  distributing  the  operating  profit  or  loss. 

2.  Liquidating  the  assets  and  satisfying  the  creditors. 

3.  Dividing  the  excess  or  deficiency  of  assets  resulting  from  the  liquidation. 

4.  Distributing  the  final  assets. 

The  last  step  may  involve  two  conditions,  both  of  which  we  will  illus- 
trate : 

1.  When  the  final  distribution  is  made  in  one  payment. 

2.  When  the  distribution  is  made  in  installments. 

Condition  1.  Final  Distribution  in  One  Payment.  Pfeifer  & 
McCready  are  partners,  sharing  profits  and  losses  equally.  Pfeifer  made 
an  original  investment  of  $50,000.00  and  McCready  $40,000.00.  Their 
business  is  not  a  success,  so  on  December  31,  1921,  they  agree  to  wind 
up  the  aff'airs  of  the  partnership.  The  assets  that  are  left  after  cred- 
itors are  paid  amount  to  $40,000.00.  How  should  these  assets  be  divided 
between  the  partners? 

Solution:    The  balance  sheet  on  December  31,  1921,  will  appear  thus: 

PFEIFER  &  McCREADY 
Balance  Sheet,  December  31,  1921 


Assets $40,000.00 

Loss  on  Assets 50,000.00 


$90,000.00 


Pfeifer,  Capital $50,000.00 

McCready,  Capital  40,000.00 


$90,000.00 


According  to  the  agreement,  this  loss  of  $50,000.00  is  divided  equally 
between  Pfeifer  and  McCready,  as  shown  by  the  journal  entry: 

December  31,  1921  Pfeifer,  Capital  $25,000.00 

McCready,    Capital    25,000.00 


Profit   and   Loss 
To  close  the  loss  into  Capital  Ac- 
counts 


$50,000.00 


Posting  this  journal  entry  we  will  have  the  following  Capital  Ac- 
counts : 

Pfeifer 


1921 
Dec. 


31 


Capital  Loss 


$25,000 


00 


1921 

Jan. 


Investment 


$50,000 


00 


McCready 


1921 
Dec. 


31 


Capital  Loss 


$25,000 


00 


1921 
Jan. 


Investment 


$40,000 


00 


Assignment  19,  Page  14 


Pfeifer  will  now  have  a  credit  balance  of  $25,000.00  and  McCready 
will  have  $15,000.00.  When  the  assets  are  converted  into  cash,  the  as- 
set accounts  are  credited,  and  the  Capital  Accounts  are  debited  and 
closed.  Pfeifer  will  receive  $25,000.00  and  McCready  will  receive  $15,- 
000.00. 

If,  however,  the  assets  did  not  realize  enough  to  pay  the  creditors  in 
full,  then  the  deficiency  would  have  to  be  made  up  by  Pfeifer  and 
McCready,  as  determined  by  court.  Dissolution  caused  by  bankruptcy 
will  be  considered  in  a  later  assignment.  Statements  of  Affairs. 

Condition  2.  Installment  Distribution.  The  dissolution  of  a  partner- 
ship may  in  some  cases  require  considerable  time.  Under  such  circum- 
stances the  partners  usually  prefer  to  receive  their  shares  in  installments 
as  quickly  as  the  cash  is  available  rather  than  wait  for  weeks  or  months. 
Such  distributions  are  called  installment  dividends.  If  they  receive  their 
share  by  installments,  the  partners  will  be  able  to  use  their  money,  which 
otherwise  might  lie  idle  until  final  settlement. 

The  installment  method,  hov/ever,  involves  the  risk  of  overpaying  one 
or  more  of  the  partners,  and  underpaying  others,  especially  when  the 
capital  ratio  is  different  from  the  profit  and  loss  sharing  ratio.  It  is  of 
course  impossible  to  know  exactly  how  much  each  partner  is  to  receive 
until  all  assets  have  been  realized.  It  is  assumed,  therefore,  that  the 
first  installment  is  all  the  partners  will  receive  and  that  all  the  rest  is 
lost.  That  is  why  the  capital  of  each  partner  is  reduced  to  the  profit 
and  loss  ratio.  Each  partner  is  given  enough  to  bring  his  capital  down 
to  that  amount. 

Assume  this  situation.  Aker  and  Baker  are  partners,  sharing  profits 
and  losses — Aker  %,  and  Baker  %.  The  firm  is  dissolved  on  July  1, 
1922.  The  creditors  are  paid  in  full.  Aker's  Capital  Account  shows  a 
credit  balance  of  $80,000.00  and  Baker's,  $45,000.00.  On  August  1,  $16,- 
000.00  has  been  realized  from  the  sale  of  the  assets;  on  September  1, 
$8,000.00;  and  on  October  1,  $4,000.00.  It  is  decided  to  distribute  this 
$16,000.00  among  the  partners  as  the  first  installment  dividend  and  not 
to  wait  until  other  assets  are  reahzed.  In  fact,  on  August  1,  it  is  not 
known  how  much  can  be  reahzed.  Therefore  the  partners  are  paid  just 
as  if  nothing  more  were  to  be  realized.  How  will  the  three  installments 
be  divided  between  Aker  and  Baker? 

Solution:     The  solution  may  be  set  up  as  follows: 

Installment  1,  ^\ugust  1,  1922 


Total 

Aker 

Baker 

Capital  Account  Balances.  .  .  . 
First  Dividend  (Distributed).  . 

Balances  (New  Capital) 

$125,000.00 
16,000.00 

$80,000.00 
14,600.00 

$45,000.00 
1,400.00 

$109,000.00 

$65,400.00 

$43,600.00 

Thus,  Aker  will  receive  $14,600.00,  and  Baker,  $1,400.00. 

Assignment  19»  Page  15 


The  Capital  Accounts  now  stand  in  the  same  ratio  as  that  by  which 
profits  and  losses  are  shared  in  accordance  with  the  agreement;  namely, 
Aker  %  and  Baker  %. 

The  easiest  way  to  understand  this  problem  is  to  work  it  out  just  as 
if  the  $16,000.00  is  all  they  are  going  to  get.  The  $109,000.00,  then, 
would  be  a  loss.  Aker  would  share  $65,400.00,  and  Baker  $43,600.00.  If 
you  were  to  debit  these  losses  to  the  Capital  Accounts,  you  would  find 
that  the  balances  remaining  are  exactly  the  amounts  distributed;  Aker, 
$14,600.00,  and  Baker  $1,400.00. 

Installment  2,  September  1,  1922 


Total 

Aker 

Baker 

Capital  

$109,000.00 
8,000.00 

$65,400.00 
4,800.00 

$43,600.00 
3,200.00 

Second  Dividend  

$101,000.00 

$60,600.00 

$40,400.00 

The  second  dividend  is  distributed  like  all  profits  and  losses.  The 
Capital  Accounts  now  stand:  Aker,  $60,000.00;  and  Baker,  $40,400.00; 
or  a  total  of  $101,000.00. 

Installment  3,  October  1,  1922. 

The  final  installment  is  $4,000.00,  of  which  Aker  receives  %,  or  $2,- 
400.00,  and  Baker  receives  %,  or  $1,600.00. 

SPECIAL  PARTNERSHIPS 

In  the  discussion  thus  far  on  partnership  accounting,  including  for- 
mation, operation,  and  dissolution,  we  have  used  the  general  partnership 
for  purposes  of  illustration.  By  a  general  partnership  we  mean  a  firm 
which  engages  in  a  continuous  business  of  a  more  or  less  permanent 
nature. 

In  your  accounting  practice  you  will  also  find  partnerships  of  a  special 
nature,  which  require  special  consideration.  The  following  three  are 
important : 

1.  Limited  partnerships. 

2.  Joint  stock  companies. 

3.  Joint  ventures. 

Limited  Partnerships.  "A  limited  partnership  is  one  in  which  certain 
members,  known  as  special  partners,  are  not  liable  for  the  obligations  of 
the  firm  in  tort  or  contract,  except  to  the  extent  of  the  capital  they  have 
invested.  At  common  law  all  partners  are  responsible  for  all  the  debts 
and  other  liabilities  of  the  firm.  Limited  partnerships,  the  conception 
of  which  is  borrowed  from  the  civil  law,  are  wholly  founded  upon  stat- 
utes."— Hirschl,  "Business  Law." 

Assignment  19,  Page  16 


From  an  accounting  point  of  view,  then,  in  dealing  with  the  forma- 
tion, dissolution,  or  the  distribution  of  profits  or  losses  in  a  limited  part- 
nership, a  knowledge  of  the  laws  of  the  state  is  essential.  Usually  the 
laws  specify  that  the  special  partner  or  partners  shall  contribute  all  of 
their  capital  in  cash,  that  they  shall  not  withdraw  any  of  the  original 
capital,  and  that  they  shall  not  be  liable  for  debts  of  the  firm  beyond  the 
amount  of  capital  they  have  invested.  It  is  usually  provided,  also,  that  a 
special  partner  shall  receive  a  certain  fixed  rate  of  interest  on  his  invest- 
ment before  the  distribution  of  profits  is  made. 

With  these  few  exceptions,  any  of  the  general  principles  developed  in 
connection  with  partnership  accounting  can  be  applied  to  accounting  for 
a  limited  partnership. 

Joint-Stock  Companies.  Another  type  of  special  partnership  espe- 
cially popular  in  England  is  the  joint-stock  company.  It  has  some  of  the 
characteristics  of  a  partnership  and  some  of  a  corporation.  The  cap- 
ital is  divided  into  shares,  and  partnership  interest  is  represented  by  these 
shares.  The  shares  are  transferable  like  those  of  a  corporation.  Accord- 
ingly, the  withdrawal  of  one  or  more  of  the  partners  does  not  dissolve 
the  partnership.  The  joint-stock  company  resembles  the  partnership 
most  closely  in  that  each  member  is  personally  liable  for  the  debts  of 
the  company.  It  differs  from  a  partnership  in  that  its  life  is  continuous, 
that  is  it  is  not  affected  by  the  death  of  a  partner. 

Accounting  for  such  a  concern  obviously  requires  a  more  elaborate 
record  of  the  shareholders  and  their  capital  investments.  Such  list  of 
members  may  be  kept  in  a  separate  subsidiary  book  with  only  one  Capital 
Account  in  the  general  ledger  to  represent  the  appregate  capital.  This 
principle  will  be  described  more  fully  in  connection  with  corporation  ac- 
counting in  the  next  assignment.  Profits  are  distributed  according  to 
the  number  of  shares  held,  so  the  procedure  is  not  very  complicated.  No 
drawing  accounts  are  required.  Since  the  real  accounting  features  are 
more  like  those  of  corporations,  they  Mali  be  easily  derived  from  the  prin- 
ciples of  corporation  accounting. 

Joint  Ventures.  A  temporary  partnership  for  the  purpose  of  carrying 
out  some  specific  project  of  a  trading  nature  has  long  been  known  as  a 
"joint  venture."  Joint  ventures  were  much  more  common  in  the  days  of 
colonial  development,  uncertain  shipping  conditions,  and  undeveloped  in- 
ternational credit  relations.  They  assumed  the  nature  of  real  adventures 
at  times  with  great  risks  involved.  For  example,  two  or  three  men  might 
form  a  temporary  partnership  for  the  purpose  of  bringing  a  cargo  of  furs 
to  England  or  for  taking  a  cargo  of  iron  to  some  far-off  colony. 

In  the  case  of  such  ventures,  there  naturally  sprang  up  quite  a  de- 
mand for  accounts  to  show  the  true  relationship,  the  profits,  and  con- 
tributions of  the  several  partners.  Altho  the  demand  for  such  account- 
ing is  not  quite  as  great  as  formerly,  there  are  still  a  number  of  cases  in 
which  temporary  partnerships  require  the  keeping  of  some  accounts.  One 
might  even  designate  as  a  joint  venture  a  temporary  agreement  between 
two  young  men  to  sell  refreshments  at  a  street  fair,  county  fair,  or 
carnival.  Practically  the  same  accounting  principles  would  apply  to  such 
a  simple  case  as  to  the  more  extended  joint  ventures. 

Assignment  19,  Page  17 


There  are  two  methods  of  operating  a  joint  venture  which  determine 
the  accounting  features: 

(a)  Where  one  set  of  books  is  kept  for  the  joint  venture. 

(b)  Where  the  transactions  of  the  joint  venture  are  kept  on  separate  books  by 
the  partners,  no  common  set  of  books  being  used. 

The  first  of  these  methods  is  so  much  like  a  regular  partnership  that 
little  need  be  said  concerning  it.  The  chief  difference  between  the  set  of 
books  of  the  joint  venture  and  of  the  ordinary  partnership  lies  in  the 
number  of  nominal  accounts.  No  elaborate  comparative  statistics  are 
required  in  the  joint  venture,  hence  all  costs  are  debited  and  all  incomes 
credited  to  one  nominal  account  called  the  "Joint  Venture  Account,"  ex- 
cept when  the  venture  covers  a  considerable  period  of  time. 

The  Joint  Venture  Account  in  a  ledger  is  similar  in  construction  and 
contents  to  a  Trading  Account  in  an  ordinary  business,  if  the  latter  re- 
ceived details  first-hand  and  not  thru  other  accounts.  The  investments 
of  the  partners  are  credited  to  their  Capital  Accounts  and  debited  to 
Cash  or  some  other  asset  account.  The  Joint  Venture  Account  is  charged 
with  goods  bought,  with  expenses  of  various  sorts,  and  with  interest  on 
capital.  It  is  credited  with  sales,  and  the  balance  (presumably  profit)  is 
divided  among  the  partners  as  agreed,  or  equally,  in  the  absence  of  any 
agreement. 

The  second  method  of  operating  joint  ventures,  in  which  no  firm 
books  are  kept,  is  the  one  that  is  used  when  it  is  difficult  or  impossible 
to  have  a  central  office  and  common  bank  account.  Each  partner  incurs 
expenses  out  of  his  own  funds,  buys  goods  for  resale,  sells  goods,  and 
collects  cash  in  accordance  with  the  agreement.  At  the  close  of  the 
venture  all  the  partners  present  statements  of  their  disbursements  and 
receipts.  From  such  statements  a  Joint  Venture  Statement  is  prepared. 
After  dividing  the  profits  or  losses,  the  accounts  of  the  partners  are  pre- 
sented for  the  purpose  of  settling  amounts  due  one  another  as  a  result 
of  unequal  expenditures  for  materials  or  services  or  unequal  collection 
of  the  proceeds  of  sales. 

Problem.  During  the  fall  of  1922,  Russell  and  Noble  engaged  in  a 
joint  venture  in  potatoes.  They  agree  to  purchase  five  carloads  of  po- 
tatoes from  Wisconsin  farmers.  It  is  agreed  that  Russell  is  to  buy  the 
potatoes  and  Noble  is  to  sell  them  from  the  car.  Profits  are  to  be  shared 
equally.    Each  party  keeps  a  separate  record. 

Russell  pays  cash  for  the  following: 

Five  carloads  of  potatoes,  2,500  bushels  @  $1.00 $2,500.00 

Freight     600.00 

Insurance    175.00 

Total $3,275.00 

Noble  incurred  the  following  expenses  and  received  the  following  cash : 

Expenses: 

Wages  for  helpers $  50.00 

Cartage     75.00 

Watchman - 15.00 

$140.00 
Assignment  19,  Page  18 


Cash  received  from  sale  of  potatoes: 

2,500  bushels  @  $1.75 _ _ _ $4,375.00 

(a)  Show  the  Joint  Venture  Account  and  the  account  of  each  partner 
as  it  would  appear  just  before  they  settled. 

(b)  How  would  final  settlement  be  made  between  Russell  and  Noble? 


SOLUTION 

Russell — Joint  Venture 


Due  from  Noble 


$3,755 


$3,755 


00 


00 


Purchases 

Expenses: 
Freight 
Insurance 

*  Net  Profit 


$600.00 
175.00 


Noble — Joint  Venture 


Cash  from  Sales 


$4,375 


$4,375 


00 


00 


Expenses: 

Wages 

Cartage 

Watchman 
^  Net  Profit 
Due  to  Russell 


$2,500 

775 
480 


$3,755 


00 


$   50 

00 

75 

00 

15 

00 

480 

00 

3,755 

00 

$4,375 

00 

RUSSELL-NOBLE 
Joint  Venture  Account — 5  Carloads  of  Potatoes 


Purchases  2,500 
bushels 

Expenses,  Russell 
Freight  $600.00 

Insurance        175.00 


Expenses,  Noble 
Wages  $  50.00 

Cartage  75.00 

Watchman  15.00 


Profit  on  Venture 

Russell   (i)  $480.00 
Noble       (§)     480.00 


$2,500 

00 

775 

ool 

140 

00 

960 

00 

$4,375 

00 

1 

Cash  from  Sales 
2,500  bushels 
@  $1.75 


$4,375 


$4,375 


00 


00 


Final  settlement  will  be  made  according  to  the  partners'  accounts. 

Assignment  19,  Page  19 


Since  Noble  took  in  all  the  cash  from  sales  and  Russell  bought  and 
paid  for  the  potatoes  out  of  his  own  pocket  Noble  obviously  owes  Russell 
the  amount  of  $3,755.00,  as  shown  in  the  accounts. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

As  you  have  noted,  this  assignment  is  made  up  quite  largely  of  illus- 
trative problems.  This  is  partly  due  to  the  great  variety  of  problems 
that  come  up  at  the  time  of  dissolution,  but  chiefly  for  the  purpose  of 
illustrating  certain  fundamental  accounting  principles.  In  reviewing  these 
principles  you  will  find  the  following  outline  a  helpful  guide. 

First:  There  are  three  things  that  an  accountant  should  consider  in 
making  entries  at  the  time  of  dissolution: 

1.  Causes  of  dissolution. 

2.  Provisions  for  dissolution  in  the  agreement. 

3.  Requirements  of  the  partnership  laws. 

Second:  There  are  two  kinds  of  dissolution;  one  without  liquidation, 
the  other  with  liquidation,  either  of  which  may  be  voluntary  or  involun- 
tary. 

I.  Without  Liquidation 

1.  Withdrawal  or  death  of  partner. 

2.  Admission  of  new  partner. 

(a)  Buying  interest  in  business  without  investing. 

(b)  Buying  interest  by  investing. 

(c)  Buying  interest  in  the  profits. 

(d)  Buying  interest  in  goodwill. 

3.  When  a  partnership  is  sold — use  of  Realization  and  Liquidation  Account. 

(a)  For  exactly  its  net  worth — close  Drawing  Accounts,  assets,  and 
liabilities.    Make  entries  on  books  of  vendor. 

(b)  For  more  than  its  net  worth — two  ways,  handle  excess  as  profit 
or  set  it  up  as  an  asset. 

(c)  For  less  than  its  net  worth — charge  losses    to  partners'  capital. 

4.  Changed  to  corporation. 

(a)  Close  books  of  partnership. 

(b)  Open  books  of  corporation. 

II.  With  Liquidation 

1.  Condition  one:    When  settlement  is  made  in  one  final  payment. 

2.  Condition  two:    When  settlement  is  made  by  installments. 

Third.    Special  Kinds  of  Partnerships. 

1.  Limited  partnerships. 

2.  Joint-stock  companies. 

3.  Joint  ventures. 

If  you  find  that  you  have  failed  to  master  any  one  of  these  main 
points  you  will  do  well  to  reread  that  portion  of  the  assignment  now,  be- 
fore taking  up  the  problems. 

Assignment  19,  Page  20 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  19 

The  problems  of  this  assignment  require  close  analysis  on  your  part. 
Analyze  each  situation  carefully  and  you  will  have  no  difficulty  in  pre- 
paring the  solutions.    Send  in  solutions  for  all  the  following  problems: 

1.  Strong  and  Powers  are  partners,  sharing  profits  and  losses  equally. 
At  the  end  of  the  second  year,  Mr.  Strong's  Capital  Account  shows  a 
credit  balance  of  $4,000.00  and  Mr.  Powers',  $2,000.00.  At  this  time 
they  admit  Mr.  Wolf  into  the  partnership,  giving  him  a  i^  interest  in 
the  business.  Give  the  journal  entries  that  must  be  made  for  each  of 
the  following  conditions: 

(a)  Mr.  Wolf  pays  $6,000.00  into  the  business — no  goodwill. 

(b)  Mr.  Wolf  pays  $6,000.00  to  the  two  partners  on  the  side — goodwill  $3,000.00. 

(c)  Mr.  Wolf  pays  $3,000.00  to  the  partners  on  the  side — no  goodwill. 

2.  On  July  1,  1922,  the  A  &  B  partnership  sells  its  business  to  Mr. 
Cole  for  $25,000.00.  Nothing  is  said  in  the  partnership  agreement  as  to 
how  profits  and  losses  are  shared.  On  that  date  the  partnership  balance 
sheet  appeared  thus: 


A  &  B  (Partnership)  Balance  Sheet,  July  1,  1922 


Cash 

Accounts  Receivable 

Building 

Land 

Equipment  


3  1,250.75 
5,312.25 

10,000.00 
2,000.00 
3,300.00 


$21,863.00 


Accounts  Payable. 
Notes  Payable  .  . 
Mortgage  Payable 
A's  Capital  .  .  . 
B's  Capital  .  .  . 


5  3,000.00 
1,200.00 
2,500.00 

10,163.00 
5,000.00 


$21,863.00 


(a)  Give  the  journal  entries  necessary  to  close  the  books  of  the  partnership. 

(b)  Give  the  journal  entries  on  the  books  of  Mr.  Cole. 

3.  Parks  and  Bird  are  partners,  sharing  profits  and  losses  equally. 
Parks  made  an  original  investment  of  $70,000.00  and  Bird,  $60,000.00. 

They  agree  to  dissolve  the  partnership  on  July  1,  1922.    Creditors  are 
paid  in  full.    The  assets  that  are  left  amount  to  $100,000.00. 

How  should  these  assets  be  divided  ? 

4.  Assume  the  same  condition  as  given  in  problem  3,  except  that 
settlement  is  made  in  installments. 

Up  to  August  1,  $25,000.00  has  been  realized  on  the  assets.    This  is 
divided  between  the  partners. 

September  1,  $75,000.00  is  realized  and  distributed. 

Show  how  both  of  these  installment  dividends  are  distributed. 

5.  Wallace  and  Yates  entered  into  a  lumber  speculation  on  Febru- 
ary 1,  Wallace  depositing  $4,500.00  and  Yates,  $3,500.00  to  their  joint 


Assignment  19,  Page  21 


credit  at  the  state  bank  of  Athens.  They  agreed  to  share  profits  or 
losses  in  proportion  to  these  amounts.  Out  of  this  they  paid  $3,500.00 
for  lumber,  $2,500.00  for  wages,  and  $1,000.00  for  freight  and  other  ex- 
penses. The  sales  up  to  August  1,  amounted  to  $12,000.00,  proceeds  of 
which  had  been  deposited  in  the  bank  and  a  check  issued  to  each  partner 
for  the  amount  of  his  investment.  The  business  was  wound  up,  Wallace 
taking  over  the  unsold  lumber  at  $950.00,  as  part  of  his  profit,  and  the 
balance  in  cash. 

(a)  Prepare  a  statement  showing  profit  or  loss  on  the  venture. 

(b)  Show  each  partner's  account  as  it  would  appear  after  the  affairs  had  been 
wound  up  and  final  settlement  made  between  the  partners. 

(c)  How  would  final  settlement  between  the  partners  be  made? 


Assignment  19,  Page  22 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assig,nrn.ent  20 

CORPORATION  ACCOUNTING, 
FORMATION,  AND  OPERATION 


IN  my  own  experience,  both  as  a  banker  and  railroad 
man,  I  have  found  a  knowledge  of  accountancy  in- 
valuable. Indeed,  I  cannot  emphasize  too  strongly  the 
advantage  it  has  been  to  me. 

WILBUR  C.  FISK,  C.  E. 

President,  Hudson  &  Manhattan  Railroad  of  N.  Y- 


LaSalle  Extension  University 

Chicago 


NHA-20 
(11-282) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyriglit  1922 

All  Riglus  Reserved  in  All  Countries 

LaSam.e  Kxtension  University 


CORPORATION  ACCOUNTING 

FORMATION  AND  OPERATION 

The  corporate  form  of  business  organization  is  more  popular  among 
business  men  to-day  than  ever  before.  The  1918  report  of  the  Commis- 
sioner of  Internal  Revenue  shows  a  total  of  almost  318,000  corporations 
in  the  United  States  with  a  capitalization  of  billions  of  dollars.  This  one 
fact  alone  is  evidence  of  the  recent  tendency  toward  the  corporate  form. 

You  yourself  have  probably  noticed  the  development  of  corporations 
in  your  community.  You  have  seen  small  manufacturing  and  trading 
concerns  that  started  as  sole  proprietorships  or  partnerships  converted 
into  corporations  for  the  purpose  of  securing  additional  capital. 

This  increasing  preference  for  the  corporate  form  of  business  has 
naturally  created  a  growing  demand  for  accountants  who  are  able  to 
handle  corporation  books  and  prepare  corporation  statements  and  reports. 

This  assignment,  therefore,  aims  to  set  forth  some  of  the  more  im- 
portant accounting  problems  that  arise  in  the  formation  and  operation  of 
a  corporation. 

Corporation  accounting  does  not  differ  in  general  fundamental  prin- 
ciples from  the  accounting  of  any  other  type  of  business  organization. 
There  are,  however,  certain  business  transactions,  accounts,  books,  and 
entries  peculiar  to  corporations  which  call  for  special  consideration  on 
the  part  of  the  accountant.     These  require  explanation  and  illustration. 

Definition  of  Corporation.  First  of  all,  it  is  well  to  understand  what 
is  meant  by  the  term  "corporation."  Chief  Justice  Marshall  has  defined 
a  corporation  as  "an  artificial  being,  invisible,  intangible,  and  existing 
only  in  contemplation  of  law."  From  the  business  and  legal  point  of  view, 
therefore,  a  corporation  is  an  individual,  even  tho  it  is  composed  of  a  group 
of  individuals.  It  is  a  creation  of  law;  that  is,  the  corporation  is  formed 
by  receiving  a  charter  from  the  state.  The  laws  of  the  state  also  govern 
its  operation. 

Formation  of  Corpoi-ations.  The  formation  of  a  corporation  begins 
with  an  informal  meeting  of  the  persons  who  desire  to  incorporate.  In 
most  states  the  law  requires  at  least  three  persons  as  original  incorpora- 
tors. A  formal  application  is  drawn  up,  stating  the  names  of  the  incor- 
porators and  their  addresses;  also  the  location  and  nature  of  the  intended 
business,  and  conforming  to  any  other  legal  requirements.  An  applica- 
tion for  the  charter  is  sent  to  the  proper  state  oflficial — usually  the  secre- 
tary of  state — with  the  necessary  fee.  If  approved,  a  charter  is  issued 
giving  the  corporation  the  right  to  exist  and  to  carry  on  business. 

Corporations  are  thus  formed  in  accordance  with  the  laws  of  the  state. 
They  are  also  subject  to  the  regulation  and  supervision  of  state  authority 
as  illustrated  by  the  franchise  tax  and  the  annual  report. 

NHA-20 


Advantages  of  Corporate  Organization.  Each  type  of  business  organ- 
ization has  its  pecuHar  advantages.  The  partnership  has  certain  advan- 
tages over  the  individual  proprietorship.  Likewise  the  corporation  has 
several  very  distinctive  advantages  over  the  partnership  as  indicated 
below. 

Partnership  Corporation 

Each  partner  is  fully  liable  for  the  obli-  A  member  (stockholder)  is  not  liable  for 

gations  of  the  partnership.  He  may  be  any  obligation  of  the  corporation.  He  may 
sued  personally  for  any  partnership  debts.      lose  the  amount  invested,  but  no  more.    In 

a  few  special  cases  the  law  specifies  an 
additional  liability,  but  this  is  limited  to 
an  amount  equal  to  his  investment. 

Withdrawal,  bankruptcy,  or  death  of  a  A  corporation  exists  permanently  or  for 

partner  dissolves  the  partnership.  a  period  of  years,  according  to  the  terms 

of  its  charter. 

New  partners  can  be  admitted  or  part-  Stockholders  may  sell,  transfer,  or  con- 

ners  can  transfer  their  interests  only  by  vey  their  shares  without  aifecting  the  cor- 
forming  a  new  partnership.  This  must  be  poration  itself.  New  stockliolders  can  be 
agreeable  to  the  other  partners.  admitted   by    purchasing   stock   from   the 

company  or  from  other  stockholders. 

Partnership  activities  are  subject  to  the  The  management  of  the  business  is 
direct  supervision  of  the  partners.  Usu-  placed  in  the  control  of  competent  persons, 
ally  all  impoi-tant  transactions  must  be  As  long  as  the  business  is  conducted  prop- 
approved  by  all  the  partners.  erly  they  act  without  interference. 

Corporate  Books  and  Records.  In  general,  the  books  of  account  and 
operating  records  for  a  corporation  are  the  same  as  those  used  in  connec- 
tion with  other  forms  of  business  organization.  For  example,  a  whole- 
sale grocery  business  may  be  a  corporation,  a  partnership,  or  a  proprie- 
torship. However  organized,  journals,  ledgers,  and  subsidiary  records  for 
bank  accounts  and  other  usual  transactions  will  be  required.  A  large 
organization  may,  of  course,  need  a  more  carefully  detailed  system  than 
a  smaller  business,  but  the  operating  records  will  be  essentially  the  same. 
For  example,  the  books  and  accounts  used  to  record  the  buying  and  sell- 
ing of  goods,  to  record  property  owned,  etc.,  are  not  subject  to  change  on 
account  of  the  form  of  organization. 

There  are  certain  books,  however,  which  are  used  exclusively  by  a 
corporation.  These  relate  chiefly  to  its  organization,  or  to  such  transac- 
tions as  do  not  arise  in  partnerships  or  proprietorships.  The  books  of 
record  peculiar  to  a  corporation  are: 

1.  Subscription  Ledger. 

2.  Installment  Book. 

3.  Capital  Stock  Ledger. 

4.  Stock  Certificate  Book. 

5.  Stock  Transfer  Book. 

6.  Minute  Book. 

7.  Dividend  Book. 

Assignment  20,  Page  2 


There  are  also  certain  accounts  that  are  peculiar  to  corporations,  such 
as  the  following: 

1.  Capital  Stock. 

2.  Subscriptions  to  Stock. 

3.  Capital  Stock  Subscribed. 

4.  Treasury  Stock. 

5.  Premium  on  Capital  Stock. 

6.  Surplus. 

7.  Dividends. 

Subscriptions  for  Capital  Stock.  One  of  the  first  steps  in  the  organiza- 
tion of  a  corporation  is  to  secure  subscriptions  for  the  capital  stock  which 
is  to  be  issued.  This  is  usually  done  as  soon  as  the  charter  has  been 
secured.  Money  must  be  provided  so  that  the  corporation  can  estabUsh 
its  business  and  begin  operations.  It  secures  the  necessary  funds  from 
persons  who  buy  the  shares  of  capital  stock. 

Subscriptions  for  the  sale  of  capital  stock  are  secured  from  prospective 
investors  by  means  of  subscription  blanks.  In  order  to  subscribe,  the 
investor  fills  in  the  number  of  shares  desired,  signs,  and  returns  the  sub- 
scription blank.  If  the  number  of  incorporators  is  small  and  the  sub- 
scriptions are  limited  to  a  few  persons  only,  a  subscription  list  is  used 
instead  of  the  separate  blanks. 

The  accounting  significance  of  subscriptions  is  that  they  are  written 
agreements  enforceable  by  law  when  properly  filled  in  and  signed.  In 
other  words,  they  are  similar  in  nature  to  Accounts  Receivable,  since  the 
corporation  has  the  right  to  deliver  the  stock  contracted  for  and  collect 
money  from  the  subscribers  who  have  agreed  to  purchase  the  stock.  Since 
the  subscriptions  give  the  corporation  valuable  claims  against  subscribers, 
it  naturally  follows  that  the  corporation's  books  should  contain  a  record 
of  all  subscriptions.    These  subscriptions  are  kept  in  a  subscription  book. 

Journal  entries  for  subscriptions  received  will  naturally  appear  among 
the  first  of  the  opening  entries.  From  these  journal  entries  the  necessary 
accounts  are  opened  and  the  subsequent  payments  recorded. 

ENTRIES  FOR  ISSUE  OF  CAPITAL  STOCK 

There  are  four  different  ways  by  which  subscriptions  to  capital  stock 
may  be  received.  The  entry  in  each  case  is  determined  by  the  method 
followed.  Note  carefully  that  the  amounts  used  are  peculiar  to  corpo- 
rations. 

Case  1.  When  capital  stock  is  subscribed  but  the  stock  is  not  to  be 
issued  to  the  purchasers  until  their  subscriptions  have  been  paid  in  full, 
the  following  entry  is  made.  Assume  that  the  amount  of  stock  author- 
ized is  $50,000.00,  one-half  of  which  is  subscribed  for. 

Subscribers  $25,000.00 

Capital  Stock  Subscribed  $25,000.00 

To  record  subscriptions  to  Capital 
Stock. 

Assignment  20,  Page  3 


In  this  case  the  debit,  which  sets  up  subscribers'  accounts  as  assets, 
has  for  its  corresponding  credit  an  account  which  acts  as  a  medium  for 
showing  the  amount  of  stock  subscribed.  The  stock  will  not  be  issued 
until  the  total  amount  subscribed  has  been  paid.  Therefore  the  actual 
issuing  of  capital  stock  is  deferred  until  this  amount  has  been  received 
in  cash.  As  the  subscribers  pay  for  their  stock,  Cash  will  be  debited  and 
the  subscribers'  accounts  credited,  indicating  the  conversion  of  subscrib- 
ers' accounts  into  cash.  The  following  entry  shows  how  the  two  accounts 
are  affected  after  all  the  cash  has  been  received. 

Cash $25,000.00 

Subscribers $25,000.00 

Since  the  subscribers'  accounts  have  now  been  paid  in  full  and  capital 
stock  can  be  issued,  the  following  entry  records  the  facts  and  the  Capital 
Stock  Subscribed  Account  is  closed: 

Capital  Stock  Subscribed $25,000.00 

Capital  Stock $25,000.00 

Some  accountants  claim  that  the  books  should  show  tlie  amount  of 
authorized  capital  stock.  If  that  is  desired,  then  the  opening  entries  will 
be  as  follows: 

Capital  Stock  Unissued $50,000.00 

Authorized  Capital  Stock  $50,000.00 

Subscribers  $25,000.00 

Capital  Stock  Subscribed  $25,000.00 

Gash $25,000.00 

Subscribers $25,000.00 

Capital  Stock  Subscribed $25,000.00 

Capital  Stock  Unissued  $25,000.00 

The  net  result,  after  these  entries  are  posted,  is  that  we  will  have  two 
accounts  on  the  ledger  for  capital  stock. 

(a)  Capital  Stock  Authorized,  with  a  credit  balance  of  $50,000.00. 

(b)  Capital  Stock  Unissued,  with  a  debit  balance  of  $25,000.00. 

According  to  this  method  no  one  account  will  show  the  capital  stock 
issued  or  outstanding.  This  amount,  however,  must  be  determined  by 
subtracting  the  debit  balance  in  the  Unissued  Capital  Stock  Account  from 
the  credit  balance  in  the  Capital  Stock  Authorized  Account. 

Since  this  plan  is  sometimes  used,  it  is  well  worth  while  for  you  to 
understand  the  method  of  making  opening  entries  in  this  way. 

Case  2.  When  capital  stock  is  issued  immediately  at  the  time  sub- 
scriptions are  received  the  entry  will  be: 

Subscribers  $25,000.00 

Capital  Stock $25,000.00 

In  this  case  the  corporation  issues  stock  on  the  basis  of  subscriptions, 
relying  on  its  rights  to  collect  the  money  later.    The  credit  is  made  to 

Assignment  20,  Page  4 


Capital  Stock  immediately,  because  the  stock  has  been  issued.  When 
cash  is  received  subsequently  in  payment  of  subscriptions,  Cash  will  be 
debited  and  the  Subscribers'  Account  will  be  credited  and  closed. 

Case  3.  When  capital  stock  is  issued  immediately  upon  payment  of 
cash  only  one  entry  is  necessary. 

Cash $25,000.00 

Capital  Stock $25,000.00 

It  is  considered  by  some  as  better  accounting  practice  to  record  sub- 
scriptions first,  even  tho  the  cash  is  received  immediately.  Capital  stock 
may  be  issued  under  several  different  arrangements,  and  in  order  to  keep 
a  complete  record  it  is  more  consistent  to  treat  all  transactions  as  sub- 
scriptions and  then  record  cash  received  as  payment  of  subscription  ac- 
counts. 

Case  4.  When  capital  stock  is  exchanged  for  property  other  than  cash, 
capital  stock  being  issued  at  once,  the  transaction  requires  but  one  entry : 

Sundry  Assets  $25,000.00 

Capital  Stock $25,000.00 

You  will  notice  that  Sundry  Assets  Account  has  been  charged  with  the 
amount  of  property  received.  This  is  desirable,  because  it  is  often  neces- 
sary to  rearrange  the  values  and  reclassify  the  property  before  separate 
accounts  can  be  opened  properly. 

SPECIAL  ACCOUNTING  BOOKS  USED  BY  CORPORATIONS 

Necessity  for  Subscription  Ledger.  In  the  cases  just  mentioned,  you 
will  observe  that  after  the  entries  have  been  posted  Subscribers'  Account 
will  appear  among  the  assets  on  the  general  ledger.  This  account  is  a 
controlling  account.  An  individual  account  is  also  required  for  each  sub- 
scriber. This  is  necessary  in  order  to  keep  an  accurate  record  and  avoid 
confusion,  especially  where  there  is  a  large  number  of  subscribers.  These 
individual  accounts  may  be  kept  in  the  subscription  ledger,  which  is  sub- 
sidiary to  and  controlled  by  the  Subscribers'  Account  on  the  general  ledger. 
This  subscription  ledger  is  much  like  the  customers'  ledger,  and  serves 
the  purpose  of  showing  the  amount  due  from  each  subscriber. 

How  to  Handle  Installment  Payments — Installment  Book.  Arrange- 
ments are  often  made  allowing  subscribers  to  pay  their  accounts  in  in- 
stallments at  regular  intervals.  In  such  a  case  the  terms  of  payment  are 
specified  on  the  subscription  blank;  therefore  it  is  necessary  to  follow  up 
the  payments  very  closely,  as  subscription  rights  may  be  forfeited  if  the 
payments  are  delinquent.  To  accomplish  this,  installment  lists  may  be 
prepared  by  drawing  off  a  Hst  of  subscribers  from  the  subscriptioij  ledger. 
If  found  desirable,  the  individual  accounts  may  be  kept  in  the  general 
ledger  when  the  subscription  list  is  used  and  there  are  only  a  few  subscrib- 
ers, thus  dispensing  with  a  subsidiary  ledger.  A  better  plan,  however,  is 
to  use  an  installment  book  which  is  similar  to  a  subscription  ledger. 

Capital  Stock  Ledger.  The  capital  stock  ledger  is  also  a  subsidiary 
ledger.  It  contains  a  record  of  the  capital  stock  purchased  and  paid  for 
by  the  various  stockholders.    Usually  the  loose  leaf  form  is  used,  and  each 

Assignment  20,  Page  6 


stockholder  is  given  one  page.  This  ledger  is  controlled  by  the  Capital 
Stock  Account  in  the  general  ledger  just  as  individual  accounts  in  the  sub- 
scribers' ledger  are  controlled  by  the  Subscribers'  Account  in  the  general 
ledger. 

Such  a  ledger  contains  an  individual  account  for  every  stockholder, 
showing  the  number  of  shares  bought,  sold,  or  transferred,  and  balance 
still  held.  The  information  is  posted  to  the  capital  stock  ledger  from  the 
certificate  book  stubs.  Whenever  a  list  of  stockholders  is  required  the 
information  can  be  readily  obtained  by  simply  taking  a  trial  balance  of 
the  capital  stock  ledger  and  checking  it  with  the  controlling  account.  Cap- 
ital Stock,  in  the  general  ledger.  The  capital  stock  ledger  page  is  illus- 
trated in  Figure  1. 


J.  B.  Adams 


DATE 

1922 

Transferred  To 

No. 
Trans- 
fer 

No. 
Certi- 
ficate 

No. 

Shares 

DATE 
1922 

No. 

Trans- 
fer 

No. 
Certi- 
ficate 

No. 

Shares 

Aug.   12 

R.  F.  Burke 

125 

134 

25 

July  10 
July  19 

F.   Carlson 
M.   L.  Thomas 

98 
107 

116 
125 

30 
25 

Stock  Ledger  Page 

Figure  1.    As  you  will  observe,  J.  B.  Adams  bought  30  shares  of  stock  from  F. 

Carlson  on  July  10.     These  shares  were  represented  by  Certificate  No.  98.    The  new 

certificate  to  Mr.  Adams  bears  the  number  116.     Analyze  the  other  two  transactions 

in  a  similar  manner.    This  stock  ledger  also  serves  the  purpose  of  the  stock  transfer 

book  which  is  explained  later  in  the  assignment. 


Stock  Certificate  Book.  Capital  stock  is  issued  in  the  form  of  cer- 
tificates, as  reproduced  in  Figure  2.  These  certificates  are  evidence  of 
ownership  of  stock  in  the  corporation.  They  show  how  many  shares  of 
capital  stock  each  stockholder  owns.  These  certificates  are  usually  kept 
in  a  stock  certificate  book  which  somewhat  resembles  a  check  book,  only 
it  is  much  larger.  The  certificates  are  filled  out  and  signed  by  the  proper 
officials.  They  are  then  torn  out  of  the  book,  leaving  a  stub  on  which  a 
brief  record  of  the  certificate  is  kept. 

If  a  capital  stock  ledger  is  not  used,  a  list  of  stockholders  together  with 
the  number  of  shares  owned  by  each  might  be  written  up  from  these  cer- 
tificate stubs  and  kept  on  file;  but  when  there  are  many  stockholders  it  is 
better  to  keep  a  detailed  capital  stock  ledger  in  order  to  avoid  confusion 
and  to  have  a  record  that  is  correct  and  complete. 

Stock  Transfer  Book.  The  transfer  book  is  a  special  record  for  all 
stock  that  is  transferred  from  one  stockholder  to  another.  It  usually  con- 
Assignment  20,  Page  6 


I 


Aasigmnent  20,  Page  7 


tains  a  reproduction  of  the  assignment  form  on  the  back  of  the  stock  cer- 
tificate, as  shown  in  Fi^re  3. 


Ledger  Folio  15.  Transfer  No.  213 

MODEL  MOTOR  CAR  COMPANY 

For  value  received  I  hereby  sell,  assign  and  transfer  unto  Charl es  Smi  th  of  Chi c ago ,  111 i - 
nois  ,  Twenty-Five  Shares  of  the  Capital  Stock  of  the  above-named  Company,  now  standing 
in  my  name  on  the  company  books,  and  represented  by  surrendered  Certificate  No.  Ill . 

Witness  my  hand  and  seal  this  10th  day  of  August,  1922 

New  Certificate  No.  415  Prank  Brown 

Issued  to  Charles  Smith  By  Thomas  Judy 

Ledger  Folio  No.  53  Attorney 


Stock  Transfer  Book 

Figure  3.    Every  page  of  the  book  contains  from  four  to  six  such  transfer  forms,  one 

below  the  other. 

The  transfer  book  is  usually  closed  a  certain  number  of  days  before 
dividends  are  to  be  paid.  The  registered  holders  of  stock  are  entitled  to 
dividends  on  the  date  when  the  transfer  book  is  closed. 

It  is  often  found  more  desirable  not  to  use  such  a  transfer  book,  but, 
instead,  record  all  transfers  on  the  left-hand  side  of  the  capital  stock 
ledger,  illustrated  in  Figure  1. 

Function  of  Transfer  Agent.  Transfers  of  stock  must,  of  course,  be 
posted  to  the  accounts  affected  in  the  stock  ledger  v/henever  stock  is 
bought  or  sold.  A  corporation  sometimes  delegates  this  detail  to  a  bank 
or  trust  company  to  act  as  its  transfer  agent.  This  is  done  mainly  to  gain 
the  confidence  of  investors.  The  bank  or  trust  company  thus  becomes  the 
custodian  of  the  stockholders'  ledger  and  the  certificate  books.  The  duties 
of  a  transfer  agent  are  to  keep  a  record  of  transfers  of  shares  of  stock; 
also  to  act  as  disbursing  agent  for  the  corporation  when  dividends  are 
declared.  Since  the  transfer  agent  has  a  complete  record  of  the  stock- 
holders he  will  receive  the  money  which  is  to  be  distributed  as  dividends 
and  pay  it  to  each  stockholder  according  to  the  number  of  shares  held. 

Changes  in  the  details  of  stock  ownership  do  not  affect  the  Capital 
Stock  Account  unless  an  increase  or  decrease  of  stock  is  authorized  by 
the  state. 

The  Minute  Book.  The  stockholders  of  a  corporation,  in  accordance 
with  the  corporation  laws,  appoint  certain  individuals  as  directors,  whose 
duty  it  is  to  manage  the  affairs  of  the  corporation.  The  directors  usually 
appoint  the  officers  of  the  corporation.  The  directors  are  required  to  meet  at 
regular  intervals,  and  at  their  meetings  the  past  transactions  of  the  busi- 
ness are  approved,  or  corrected  if  necessary,  and  future  plans  are  agreed 
upon.  It  is  necessary,  therefore,  that  the  proceedings  of  the  directors' 
meetings  be  made  a  matter  of  record.  The  minute  book  is  used  for  this 
purpose  as  well  as  to  record  the  proceedings  at  the  stockholders'  meetings. 

Assignment  20,  Page  8 


The  minute  book  serves  as  a  guide  to  the  directors,  who  represent  the 
stockholders,  as  well  as  to  the  officers,  who  carry  out  the  policies  of  the 
directors.  For  this  reason  the  minute  book  is  one  of  the  most  important 
books  of  the  corporation.  The  minutes  furnish  authority  to  the  officers 
for  many  important  transactions,  which  they  carry  out  as  instructed  by 
the  directors.  From  the  minutes,  also,  the  accountant  obtains  informa- 
tion for  many  important  entries,  such  as  contracts,  special  services,  legal 
proceedings,  etc.  In  fact,  it  is  the  accountant's  duty  in  auditing  important 
transactions  which  he  finds  recorded  on  the  books  to  refer  to  the  minute 
book  in  order  to  determine  if  such  transactions  were  effected  according 
to  instructions  laid  down  by  directors,  or  if  these  transactions  had  the 
approval  and  ratification  of  the  directors. 

The  Dividend  Book.  The  dividend  book  contains  the  names  of  all  stock- 
holders who  are  to  receive  dividends.  It  shows  the  number  of  shares  held, 
the  kind  of  stock,  rate  of  dividend,  and  amount  each  stockholder  is  to  re- 
ceive. 

This  book  is  the  basis  for  entries  in  the  cash  book,  when  the  dividends 
are  paid. 


KINDS  OF  CAPITAL  STOCK 

The  various  kinds  of  capital  stock  are  here  explained,  so  that  you  will 
be  familiar  with  the  most  important  classes. 

Par- Value  Capital  Stock.  Par  value,  as  used  in  connection  with  capital 
stock,  expresses  a  uniform  value  for  the  shares  into  which  authorized  cap- 
ital stock  is  divided.  Par  value  means  the  face  or  nominal  value  placed  on 
a  share  of  stock,  this  value  being  the  same  for  all  shares  of  a  like  class. 
In  the  application  for  a  charter  it  is  customary  to  specify  the  number  of 
shares  as  well  as  the  amount  of  stock  to  be  issued.  This  procedure  de- 
termines what  the  par  value  will  be.  Usually  it  is  fixed  at  $100.00  altho 
it  may  be  any  amount,  such  as  $50.00,  $25.00,  $10.00,  or  $1.00.  A  cer- 
tificate of  par-value  stock  was  illustrated  in  Figure  2. 

Figure  2  shows  that  the  Model  Motor  Car  Company  has  been  author- 
ized by  the  state  to  issue  stock  up  to  an  amount  of  $500,000.00,  divided 
into  5,000  shares.  Therefore  the  par  value  per  share  is  $100.00.  Fur- 
thermore, this  certificate  No.  87  indicates  that  one  of  the  stockholders 
owns  $5,000.00  par  value  of  the  capital  stock. 

Capital  Stock  of  No  Par  Value.  Several  of  the  states  now  allow  cor- 
porations to  issue  stock  without  par  value.  When  this  is  done  each  stock 
certificate  must  show: 

1.  Total  number  of  shares  authorized. 

2.  Number  of  shares  represented  by  the  certificate. 

Various  other  regulations  sometimes  govern  the  issuing  of  stock  with- 
out par  value.  These  all  tend  toward  protecting  the  interests  of  the  stock- 
holders, as  well  as  accomplishing  the  result  of  showing  stockholders'  in- 
terests without  the  use  of  a  nominal  value. 

Assignment  20,  Page  9 


The  book  value  of  a  share  of  no-par-value  stock  can  be  determined  thus : 
If  a  stockholder  owns  ten  shares  of  no-par-value  stock  and  there  are  only 
1,000  shares  of  stock  (all  no-par-value)  outstanding,  his  interest  amounts 
to  1/100  of  the  corporation's  net  assets. 

Preferred  and  Common  Stock.  From  the  standpoint  of  stockholders' 
rights  there  are  two  general  classes  of  stock,  common  and  preferred.  Each 
class  is  recorded  separately  on  the  books.  At  one  time  it  was  customary 
to  issue  but  one  kind  of  stock,  in  which  case  all  stockholders'  interests 
were  alike.  Such  stock  was  common  stock.  Later  a  separate  class  of 
stock  was  created,  called  preferred  stock,  giving  the  holders  of  such  stock 
either  preferred  claims  on  the  assets  or  on  the  earnings  from  their  invest- 
ment, or  both.  Therefore,  instead  of  having  an  interest  in  common,  pre- 
ferred-stock holders'  interests  precede  the  rights  of  those  who  hold  com- 
mon stock.  Their  investment,  for  example,  may  be  preferred,  since  in  case 
of  dissolution  or  termination  of  the  company,  after  creditors  have  been 
satisfied  a  distribution  of  the  company's  property  is  first  made  among 
the  preferred-stock  holders.  When  preferred  stock  provides  first  claim  on 
profits,  a  fixed  rate  of  dividend  is  specified.  These  dividends  may  be 
"cumulative,"  meaning  that  if  the  full  rate  of  dividend  cannot  be  paid  out 
of  the  earnings  of  a  given  period  the  unpaid  dividends  will  accumulate  in 
favor  of  stockholders,  and  must  be  fully  paid  before  any  distribution  of 
profits  can  be  made  to  the  common-stock  holders.  Noncumulative  stock 
carries  no  such  right. 

It  might  appear  that  preferred  stock  is  more  to  be  desired  than  com- 
mon stock.  This  is  probably  true  in  some  cases,  especially  in  a  newly 
organized  company  whose  earning  power  has  not  yet  been  fully  developed. 
There  are  many  cases,  however,  where  the  common  stock  has  a  higher 
market  price,  due  to  the  fact  that  a  corporation  has  been  prosperous. 
Since  the  preferred-stock  holders  are  restricted  to  a  specified  dividend,  the 
common-stock  holders  might  receive  larger  earnings  than  the  holders  of 
preferred  stock.  Due  to  the  fact  that  the  rights  of  holders  of  common 
stock  and  preferred  stock  differ  separate  accounts  must  be  kept  for  each. 

How  Treasury  Stock  Is  Recorded.  Treasury  stock  is  stock  which  has 
once  been  issued  by  the  corporation  and  later  reacquired  by  purchase  or 
gift.  The  term  is  often  loosely  and  incorrectly  used  for  unissued  stock, 
which  is  more  properly  called  stock  in  the  treasury.  When  treasury  stock 
is  acquired  by  purchase  it  should  be  entered  on  the  books  as  an  asset  at 
its  cost  price.  Assume  that  a  corporation  buys  back  $10,000.00  worth  of 
its  own  stock.    The  entry  will  be: 

Treasury  Stock $10,000.00 

CaBh 810,000.00 

To  record,  the  purchase  of  100  shares  of  Com- 
pany's own  stock. 

If  treasury  stock  is  acquired  by  gift  the  company  has  realized  a  profit 
of  a  special  nature.  It  is  necessary  to  keep  such  profit  separate  and  dis- 
tinct from  the  ordinary  earnings  due  to  operations.  The  company  has 
given  nothing  in  exchange  for  the  stock  so  acquired.  Therefore  an  ac- 
count for  donated  surplus  or  capital  surplus  must  be  opened  to  record  the 

Assignment  20,  Page  10 


fact  that  the  company  has  been  benefited  by  the  gift.  The  stock  should 
be  entered  on  the  books  as  an  asset  at  its  market  value,  if  the  stock  is 
being  bought  and  sold  on  the  market,  or  at  a  fair  value,  as  shown  by  the 
financial  condition  of  the  company.  This  is  the  proper  measure  of  the 
value  of  the  asset  acquired;  also  the  amount  of  surplus  created  by  the 
donation.  The  entry  for  recording  $8,000.00  worth  of  treasury  stock 
donated  by  one  of  the  stockholders  will  be: 

Treasury  Stock  $8,000.00 

Donated  Surplus  $8,000.00 

(or  Capital  Surplus) 

To  record  the  donation  of  100  shares  of  the 
company's  stock  at  current  market  price  on 
the  date  acquired  (or  value  as  shown  hy  the 
company's  financial  statement). 

When  donated  treasury  stock  is  sold  subsequently,  it  may  be  that  it 
will  be  sold  at  a  different  price  from  that  determined  when  it  was  donated. 
If  the  selling  price  is  greater,  it  will  increase  the  Donated  Surplus  or  Cap- 
ital Surplus  Account.  If  the  stock  is  sold  for  less,  the  difference  will  be 
charged  against  Donated  Surplus  Account.  In  either  case  it  will  indicate 
the  actual  amount  of  surplus  which  has  been  reaUzed. 

Stock  is  usually  donated  to  corporations  by  the  stockholders  to  whom 
it  is  first  issued,  as  a  means  of  providing  the  corporation  with  working 
capital.  It  is  also  frequently  done  as  a  method  to  meet  the  legal  require- 
ment that  stock  must  be  issued  as  "fully  paid." 

Bonus  Stock.  Frequently  common  stock  is  issued  as  a  bonus  to  in- 
vestors who  purchase  preferred  stock.  Any  stock,  however,  which  the 
corporation  gives  away  as  a  bonus  should  be  stock  which  it  holds  in  the 
treasury,  which  has  been  originally  issued  in  accordance  with  legal  pro- 
visions and  then  reacquired.  It  is  evident  that  the  corporation  may  sell 
stock  of  this  kind  at  any  price  or  give  it  away,  just  as  any  individual  stock- 
holder has  a  right  to  make  whatever  disposition  he  pleases  of  his  stock. 

It  is  important  for  the  accountant  to  note  that  treasury  stock  has  no 
voting  power  and  no  dividend  rights  as  long  as  it  is  held  by  the  corpora- 
tion, since  a  corporation  cannot  assume  the  fictitious  position  of  owning 
a  part  of  itself.  Treasury  stock,  however,  acquires  voting  power  and 
dividend  rights  as  soon  as  it  is  sold,  because  it  is  then  in  the  hands  of 
stockholders  who  are  entitled  to  the  usual  rights  and  powers  conveyed 
by  the  stock  which  they  hold. 

ACCOUNTS  PECULIAR  TO  CORPORATIONS 

Altho  you  are  already  familiar  with  some  of  the  accounts  used  in  cor- 
porations, there  are  several  that  require  special  consideration,  especially 
Capital  Stock,  Surplus,  and  Dividend. 

Is  the  Capital  Stock  Account  a  Liability?  The  question  is  often  asked 
whether  the  Capital  Stock  Account  represents  a  liabihty.  There  is  a  great 
deal  of  unnecessary  vagueness  and  misunderstanding  on  this  point.  The 
difficulty,  however,  disappears  at  once  when  we  remember  that  the  Capital 
Stock  Account  merely  indicates  the  capital  interest.  The  corporation  is 
under  no  more  obligation  to  return  this  investment  of  capital  to  the  stock- 
Assignment  20,  Page  11 


liolders  than  a  business  owned  by  partners  or  a  sole  proprietor  is  bound  to 
return  the  capital  which  they  have  invested.  Stockholders  do  not  have 
the  rights  of  creditors.  The  certificates  of  stock  in  the  hands  of  the  in- 
vestors in  a  corporation  are  not  evidences  of  a  debt,  but  are  evidences  of 
a  share  or  interest  in  the  ownership  of  the  business ;  an  interest  which  is, 
of  course,  returnable  to  the  stockholder  upon  dissolution  of  the  corpora- 
tion if  there  are  sufficient  assets  over  and  above  the  liabilities. 

Purpose  of  the  Surplus  Account.  In  our  discussion  of  partnerships  we 
noted  that  a  Drawing  Account  is  used  for  each  one  of  the  partners,  as 
it  is  undesirable  to  credit  earnings  and  charge  withdrawals  directly  to  the 
Capital  Accounts. 

In  corporation  accounting  it  is  all  the  more  important  to  maintain  a 
separate  account  for  the  current  and  accumulated  earnings  and  also  the 
charges  against  profits  because  of  the  fact  that  the  capitalization  is  fixed 
by  the  charter  and  cannot  be  changed  without  authority  from  the  state. 
The  important  difference  between  the  accounting  records  of  a  corporation 
and  those  of  a  single  proprietorship  or  a  partnership  lies  in  the  record  of 
proprietary  interest. 

In  the  corporation,  ownership  is  expressed  in  two  groups  of  accounts 
— the  Capital  Stock  Account  and  the  Surplus  Account.  The  Capital  Stock 
Account  represents  the  direct  investment  of  stockholders  as  is  supported 
by  a  list  of  the  stock  outstanding.  This  account  remains  unchanged  unless 
the  company  sells  some  of  its  unissued  stock  or  cancels  and  permanently 
retires  some  of  the  outstanding  stock.  Also,  as  mentioned  previously,  the 
capital  stock  may  be  increased  by  authority  from  the  state  granting  an 
increase  in  the  amount  of  capital  stock  authorized  thru  amendment  of 
the  charter.  The  Surplus  Account,  on  the  other  hand,  receives  the  profits 
of  the  business  as  they  accumulate.  Each  year  the  current  profits  or 
losses  are  closed  into  the  Surplus  Account.  In  this  way  profits  are  ac- 
cumulated from  year  to  year. 

Suppose  that  a  corporation,  organized  on  January  1,  1921,  has  a  net 
profit  of  $10,000.00  for  the  year  1921.  On  December  31,  when  the  books 
are  closed,  the  net  profit  appearing  in  the  Profit  and  Loss  Account  as  a 
credit  is  closed  into  the  Surplus  Account  thus: 

December  31,  1921  Profit  and  Loss $10,000.00 

Surplus $10,000.00 

To  close  the  net  profit 
into  surplus. 

The  Surplus  Account  will  remain  open  on  the  books  for  the  year  1922. 
It  represents  a  part  of  the  capital  or  net  worth  of  the  corporation,  the 
balance  appearing  in  the  Capital  Stock  Account. 

Part  of  the  Surplus  Account  may  be  set  aside  for  special  appropria- 
tions. These  are  call  "Reserves";  for  example,  reserve  for  floods,  dam- 
ages, etc.  It  must  be  fully  understood  that  such  appropriations  out  of 
surplus  are  still  a  subdivision  of  the  Surplus  Account.  They  represent 
part  of  surplus  set  aside  which  may  again  be  returned  to  surplus.  The 
resolution  which  provided  for  the  appropriation  can  be  reversed  by  the 
directors  at  any  time,  and  by  another  resolution  the  amount  be  thrown 

Assignment  20,  Page  12 


back  into  sui*plus  and  made  available  for  dividends,  if  it  is  found  that  the 
special  appropriation  will  not  be  required.  The  Surplus  Account  therefore 
reflects  the  increase  or  decrease  in  proprietary  interest  exclusive  of  the 
stockholders'  capital  investments. 

Purpose  of  Capital  Surplus  Account.  It  is  desirable  to  keep  an  entirely 
separate  account  for  that  surplus  which  is  accumulated  otherwise  than 
by  profits  from  operations.  This  is  done  primarily  to  maintain  a  con- 
servative and  safe  business  policy.  For  example,  surplus  arising  from 
capital  stock  donated,  as  previously  discussed  in  connection  with  treasury 
stock,  should  not  be  entered  in  the  regular  Surplus  Account  covering  earn- 
ings of  the  business.    It  is  credited  to  the  Capital  Surplus  Account. 

Likewise,  an  adjustment  may  be  made  of  the  plant  and  property  values 
of  a  business,  and  if  the  revised  figures  exceed  the  former  figures  as  shown 
on  the  books  the  difference  is  credited  to  an  account  called  "Capital  Sur- 
plus," indicating  that  surplus  of  this  nature  arises  from  an  increase  in  the 
valuation  of  capital  assets  as  distinguished  from  profits  on  operations. 
While  the  policy  of  appreciating  values  of  fixed  assets  is  not  considered 
good  practice  generally,  such  appreciation  sometimes  arises  when  property 
values  are  readjusted.  When  land  or  other  assets  are  donated  to  a  corpo- 
ration these  values  are  charged  to  asset  accounts  and  credited  to  capital 
surplus. 

The  reason  for  keeping  an  entirely  separate  account  for  capital  sur- 
plus is  to  provide  more  accurate  accounting  for  earnings  and  avoid  dis- 
tributing these  profits  as  dividends.  The  transactions  on  which  these 
profits  are  based  are  too  closely  related  to  capital  investments,  and  if  these 
profits  were  paid  out  to  the  stockholders  it  would  result  in  a  refund  of 
part  of  their  capital  investment.  Such  profits  are  to  be  carefully  dis- 
tinguished from  profits  made  by  the  business  thru  the  use  of  the  capital 
which  the  stockholders  have  invested.  As  a  general  rule,  therefore,  divi- 
dends should  be  paid  out  of  the  earnings  of  the  business  arising  from 
operations. 

Declaration  and  Payment  of  Dividends.  Dividends  are  the  profits  that 
are  distributed  to  the  stockholders.  They  are  not  a  liability,  however, 
until  they  have  been  declared  by  the  board  of  directors,  and  they  cannot 
legally  be  paid  until  they  are  so  declared. 

Assume  that  the  corporation  referred  to  above  has  $100,000.00  capital 
stock  outstanding,  all  of  which  is  common  stock.  The  profits  for  1921 
amount  to  $10,000.00.  The  board  of  directors  declares  a  5  per  cent  cash 
dividend  on  January  2,  1922.  When  this  dividend  is  declared,  as  shown 
by  the  record  in  the  minutes,  an  entry  setting  up  the  liability  on  the  books 
should  be  made  as  follows: 

January  2,  1922  Surplus $5,000.00 

Dividends  Payable  .  .  $5,000.00 

To  record  a  5  per  cent 
dividend  out  of  profits 
for  1921,  as  declared  by 
the  directors  on  January 
2,  1922. 

Assignment  20,  Page  18 


Assuming  that  checks  are  issued  to  the  stockholders  on  January  4  in 
payment  of  this  dividend,  the  entry  to  be  made  would  be: 

January  4,  1922  Dividends  Payable $5,000.00 

Cash $5,000.00 

To  record  the  payment  of 
dividends  as  declared  on 
January  2,  1922. 

Dividends  may,  of  course,  be  in  the  form  of  stock  or  scrip  instead  of 
cash. 

Capital  Stock  Premium  or  Discount.  Stock  is  sometimes  sold  or  issued 
above  or  below  par.  If  above  par,  it  is  said  to  be  at  a  premium ;  if  below, 
at  a  discount.  Several  of  the  states  prohibit  the  issuing  of  stock  at  a  dis- 
count, as  it  tends  to  overstate  capital  stock,  which  is  not  fully  paid.  In 
some  cases  stock  is  sold  at  a  premium  to  establish  a  surplus  for  a  newly 
organized  business.  The  market  price  is  therefore  above  the  par  value, 
resulting  in  a  premium,  for  which  cash  or  cash  value  is  received.  When  a 
corporation  sells  stock  at  a  premium,  the  excess  over  par  value  is  credited 
either  to  a  Premium  Account  or  to  Capital  Surplus.  The  two  following 
entries  illustrate  the  proper  record  for  stock  sold  at  a  premium  and  at 
a  discount. 

(a)  Cash  or  other  Property $ 

Capital  Stock S 

Premium  on  Stock  (or  Capital  Surplus)  


In  this  case  premium  on  stock  is  a  deferred  credit. 


(b)  Cash 

Discount  on  Stock. 
Capital  Stock  . 


The  discount  on  stock  represents  a  deferred  charge. 

CORPORATION  STATEMENTS 

In  the  case  of  a  corporation  the  accountant  is  expected  to  prepare  two 
kinds  of  reports  and  statements: 

1.  For  the  directors  and  corporation  officials. 

2.  For  the  stockholders  and  the  government. 

The  first  kind  of  statement,  namely,  that  for  the  executives,  is  given 
consideration  in  this  assignment. 

The  purpose  of  such  statements  is  to  inform  corporate  officials  on  the 
financial  condition  and  progress  of  the  business.  In  the  small  corpora- 
tion, monthly  or  quarterly  balance  sheets  and  profit  and  loss  statements 
are  sufficient.  In  the  larger  concern,  however,  where  the  officials  are 
unable  to  keep  in  personal  touch  with  the  details,  it  is  desirable  for  the 
accountant  to  keep  the  officers  informed  continually. 

Information  on  sales,  collections,  bank  balances,  and  expenditures 
should  be  reported  daily.  Cash  receipts  and  disbursements  should  be  re- 
ported weekly.    The  balance  sheet  and  profit  and  loss  statements  should 

Assignment  20,  Page  14 


be  submitted  at  least  once  a  month.  In  most  cases  it  is  desirable  to  fur- 
nish not  only  the  current  reports  and  statements  but  also  comparative 
statements,  covering  the  two  or  three  preceding  periods. 

The  Corporation  Balance  Sheet.  The  balance  sheet  of  a  corporation 
is  similar  in  most  respects  to  the  balance  sheet  for  any  other  type  of  busi- 
ness; that  is,  assets  and  liabilities  are  classified,  as  has  been  explained  in 
previous  assignments. 

The  special  point  to  consider  in  a  corporation  balance  sheet  is  the  items 
in  the  net-worth  section.    They  will  appear  somewhat  as  follows : 

Surplus: 

1.  Appropriated  Surplus 

Reserve  for  Contingencies S 

Reserve  for  Sinking  Fund 


Total  Reserves  

2.  Free  Surplus  (available  for 
dividends) 


Total  Surplus 
Capital  Stock: 

Preferred  Stock. 
Common  Stock  .  . 


Total  Capital  Stock. 


The  Profit  and  Loss  Statement.  The  profit  and  loss  statement  of  a 
corporation  is  essentially  the  same  as  that  for  any  other  type  of  business, 
except  that  it  has  certain  additional  items  following  the  net  profit  figure. 
These  items  are  arranged  somewhat  like  this: 

Net  Profit S 

Surplus  at  beginning  of  period 


Profit  and  loss  before  deducting  dividends. 

Dividends  declared 

Amount  set  aside  in  sinking  fund 


Profit  and  loss  surplus  Dec.  31,  1921 $. 


In  manufacturing  concerns  it  is  necessary  also  to  prepare  a  manu- 
facturing statement,  which  will  be  explained  in  Assignment  23.  Your 
next  assignment  will  present  problems  that  arise  when  corporations  are 
reorganized  or  when  several  corporations  are  merged  into  one  larger  or- 
ganization. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

In  this  assignment  we  have  illustrated  the  following  principles,  that 
are  essential  to  a  thoro  understanding  of  corporation  accounting.  As 
stated,  a  knowledge  of  corporation  accounting  is  becoming  more  necessary 
because  of  the  increase  in  the  number  of  corporations. 

First :    Every  corporation  accountant  should  be  thoroly  familiar  with : 

1.  Plan  of  formation,  especially  how  to  secure  the  charter  and  sub- 
scriptions for  capital  stock. 

2.  Corporation  laws  that  control  the  operations  of  the  business. 

Assignment  20,  Page  15 


Second:    Opening  entries  for  a  corporation: 

1.  When  stock  is  subscribed  for  but  not  issued  until  paid. 

2.  When  stock  is  issued  immediately  at  the  time  subscriptions  are 
received. 

3.  When  stock  is  issued  in  direct  exchange  for  cash. 

4.  When  stock  is  sold  for  property  other  than  cash. 

Third:     Need  for  special  corporation  books: 

1.  Subscription  Ledger. 

2.  Installment  Ledger. 

3.  Capital-Stock  Ledger. 

4.  Stock-Certificate  Book. 

5.  Stock-Transfer  Book. 

6.  Minute  Book. 

7.  Dividend  Book. 

Fourth:    Special  accounts  used  in  corporations: 

1.  Capital  Stock. 

2.  Subscription  to  Stock. 

'3.  Capital  Stock  Subscribed. 

4.  Treasury  Stock. 

5.  Premium  on  Capital  Stock. 

6.  Surplus. 

7.  Dividends. 

Fifth:    Various  kinds  of  stock: 

1.  Par- Value  Stock  and  No-Par- Value  Stock. 

2.  Preferred  and  Common  Stock. 

3.  Treasury  Stock  and  Unissued  Stock. 

4.  Bonus  Stock. 

Sixth:     Special  consideration  of  certain  corporation  accounts: 

1.  Is  capital  stock  account  a  liability? 

2.  Purpose  of  surplus  account. 

3.  Capital  surplus  for  special  profits. 

4.  Declaration  and  payment  of  dividends. 

5.  How  to  handle  premium  and  discount  on  sale  of  stock. 

Seventh:     Special  features  of  corporation  statements: 

1.  Balance  sheet  with  classification  of  surplus. 

2.  Profit  and  loss  statement  with  analysis  of  surplus  and  dividends. 

You  will  find  this  summary  of  practical  value  in  solving  the  following 
problems. 

Assignment  20,  Page  16 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  20 

1.  The  Standard  Supply  Company  has  just  been  organized.  You  find 
the  following  information  from  the  various  records. 

The  charter  shows: 

Capital  Stock  Authorized: 

Preferred,  500  shares,  $  50,000.00. 
Common,  1,000  shares,  $100,000.00. 

The  minute  book  shows: 

(a)  One-half  of  the  stock  of  each  class  is  to  be  issued  at  this  time. 

(b)  The  directors  have  agreed  to  purchase  a  factory  building  and 
the  land  on  which  it  is  situated  from  A.  J.  Andrews,  giving 
him  a  certificate  for  300  shares  of  common  stock  in  exchange 
for  the  deed  to  the  property. 

The  subscription  ledger  shows: 

Subscriptions : 

L.  M.  Drake,  100  Shares  Preferred,  50  Shares  Common. 

B.  R.  James,  50  Shares  Preferred,  50  Shares  Common. 

D.  P.  Crane,  100  Shares  Common. 

Certificate  to  be  issued  when  accounts  have  been  paid. 

The  cash  book  shows: 

The  balance  of  the  preferred  stock,  up  to  one-half  of  the  authorized 
amount,  has  been  sold  for  cash  and  certificates  issued. 

Make  journal  entries  for  these  transactions. 

2.  The  Western  Manufacturing  Company  has  an  authorized  capital  of 
$150,000.00  (par  value  of  stock  $100.00).  the  capital-stock  ledger  shows 
that  of  this  amount,  1,000  shares  are  outstanding  in  the  hands  of  stock- 
holders. 

The  minute  book  shows  that  the  directors  have  declared  a  dividend 
of  5  per  cent. 

The  general  ledger  shows  a  balance  in  the  Capital  Stock  Account  of 
$123,968.00.  Since  shares  are  not  issued  for  fractional  amounts,  this  bal- 
ance indicates  that  an  error  has  been  made.  The  bookkeeper,  unfamiliar 
with  the  difference  between  corporation  and  partnership  accounting,  has 
closed  profit  and  loss,  each  year,  directly  into  Capital  Account. 

Annual  profit  and  loss  from  the  first  year  to  date: 

1918 _ $  6,146.00  loss 

1919 - 2,720.00  profit 

1920 11,883.00  profit 

1921 15,511.00  profit 

Assignment  20,  Page  17 


Make  the  necessary  journal  entries  as  follows: 

(a)  To  adjust  the  Capital  Account  and  set  up  Surplus  Account. 

(b)  To  record  the  dividend  declared. 

(c)  To  record  cash  payment  of  dividend. 

3.  The  city  of  Dayton  donated  land,  worth  $25,000.00,  to  the  Chemical 
Corporation  Company,  on  condition  that  the  company  construct  an  addi- 
tional building  worth  $100,000.00.  This  the  company  did.  How  should 
this  transaction  be  entered  on  the  books? 

4.  The  Chicago  Trading  Company  asks  you  to  prepare  for  them  a 
trading  and  profit  and  loss  statement  for  the  year  ending  December  31, 
1921.  You  will  note  that  they  have  four  selling  departments  and  that 
their  accounts  are  so  classified  that  a  trading  statement  may  be  prepared 
for  each.  The  following  figures  are  furnished  you  and  may  be  assumed 
correct.  Use  your  ingenuity  to  prepare  an  exhibit  that  will  be  easy  for 
your  client  to  understand. 

Gross  Sales,  Dept.  A $20,000.00 

"  "  "       B - 45,000.00 

"  "  "       C 14,200.00 

"  "  "      D 53,350.00 

Purchase   Discounts   696.00 

Interest  Earned  214.00 

Sales  Returns  and  Allowances,  Dept.  A 122.00 

"  "  "  "        B 516.00 

"  "  "  "  "        C 64.00 

"  "  "  "  "       D 75.00 

Inventory,  Jan.  1,  1921,  Dept.  A 3,418.00 

"      "       "  "       B -.     8,202.00 

"  "      "       "  "        C 1,996.00 

«  "      "       "  "       D 9,011.00 

Purchases,  Dept.  A 19,022.00 

"      B „ 39,449.00 

"       C 15,122.00 

"  "      D 47,451.00 

Selling,  Salaries  6,000.00 

"         Supplies 1,000.00 

"         Advertising     2,500.00 

"         Miscellaneous     418.00 

Administrative,  Salaries  3,000.00 

"  Supplies     _ 750.00 

"  Miscellaneous   2,200.00 

Sales  Discounts  411.00 

Interest  Paid 109.00 

Insurance    _ „ 200.00 

Taxes   „ _ 425.00 

The  merchandise  inventories  at  the  end  of  the  year  were : 

Department   A $  4,568.00 

B _ 10,796.00 

"  C - 3,979.00 

"  D _ _ 13,288.00 

The  balance  sheet  surplus  at  the  beginning  of  the  year  was  $24,077.00, 
and  dividends  declared  during  the  year  were  $5,000.00. 

Assignment  20,  Page  18 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  fl«/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  21 

CORPORATION  ACCOUNTING 
REORGANIZATIONS  AND  MERGERS 


A  LL  the  problems  of  business,  when  all  is  said  and 
-^  ^  done,  get  down  at  last  to  the  bedrock  of  figures,  and 
only  by  intelligent,  scientific  analysis  of  figures  is  itpossi- 
ble  to  reach  the  solutions  of  such  problems. 

Geo.  Wattley 

Treasurer,  United  Retail  Stores  Corporation 


LaSalle  Extension  University 

Chicago 


NHA-21 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entiy 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


CORPORATION  ACCOUNTING 
REORGANIZATIONS  AND  MERGERS 

If  you  were  to  trace  back  the  history  of  larg-e  modern  corporations, 
you  would  find  that  many  of  them  have  undergone  some  change  in  organ- 
ization since  their  incorporation.  These  changes  have  been  made  for 
various  reason,  i.e.,  to  secure  additional  capital,  eliminate  competition,  or 
to  satisfy  creditors. 

For  example,  the  National  Biscuit  Company  was  incorporated  in  1908 
by  a  consolidation  of  the  American  Biscuit  and  Manufacturing  Company, 
the  New  York  Biscuit  Company,  and  the  United  States  Baking  Company. 
As  a  result,  its  business  has  prospered  to  such  an  extent  that  it  now  op- 
erates forty-two  separate  plants,  with  over  200  selling  agencies. 

The  Noiseless  Typewriter  Company  was  incorporated  in  Delaware  in 
1920,  to  succeed  the  Noiseless  Typewriter  Company  incoiTDorated  in  1914 
in  Connecticut,  which  in  turn  was  the  successor  of  a  company  incorporated 
in  1909. 

The  Nash  Motors  Company  was  incorporated  in  1916,  as  successor  to 
the  Thomas  B.  Jeffery  Company,  Kenosha,  Wis.  The  Maxwell  Motor  Cor- 
poration was  organized  in  1921,  by  merging  the  Maxwell  Motor  Company 
and  the  Chalmers  Motor  Corporation. 

Countless  other  examples  might  be  presented  of  changes  in  corpora- 
tions. Perhaps  in  your  own  community  you  will  find  one  or  more  corpo- 
rations that  have  been  organized  from  one  or  more  existing  businesses. 
That  is  the  way  that  many  corporations  of  to-day  have  come  into  existence, 
namely,  by  reorganization  and  merger. 

Difference  Between  Reorganizations  and  Mergers.  When  a  corporation 
is  financially  embarrassed  or  is  unable  to  satisfy  its  creditors  promptly,  a 
reorganization  committee  or  a  receiver  may  be  appointed  to  reorganize  it 
and  manage  its  affairs  under  a  new  plan.  In  this  way,  creditors  can  expect 
to  realize  on  their  claims.  When  the  business  is  thus  continued  under  new 
management,  it  is  called  a  reorganization.  If  the  business  is  liquidated, 
the  assets  are  sold  and  the  proceeds  divided  among  the  creditors. 

When,  however,  a  corporation  is  combined  or  consolidated  with  one  or 
more  corporations,  the  combination  is  called  a  merger.  In  the  case  of 
merger,  one  of  two  conditions  may  exist. 

1.  Consolidation.  All  the  combining  corporations  are  dissolved  and  a 
new  corporation  is  organized.  For  example,  the  Mitchell  Motors  Company 
was  organized  in  1916  by  combining  the  Mitchell-Lewis  Motor  Company 
and  the  plant  of  the  Mitchell  Wagon  Company.  The  combination  resulted 
in  an  entirely  new  corporation. 

NHA-21 


2.  Absorption.  One  of  the  merging  corporations  continues  to  exist, 
by  merely  absorbing  the  other  corporations.  For  example,  the  National 
Carbon  Company  of  New  York  bought  the  assets  of  the  National  Carbon 
Company  of  N.  J.  The  result  was  that  the  New  Jersey  Corporation  was 
absorbed  by  the  New  York  concern. 

Accounting  Procedure  for  Reorganizations  and  Mergers.  Some  reor- 
ganizations and  mergers  are  naturally  much  more  complicated  than  others. 
The  more  involved  combinations  will  be  taken  up  in  one  of  the  more  ad- 
vanced assignments.  In  this  assignment  we  will  consider  only  the  simpler 
reorganizations  and  mergers.  Whether  involved  or  simple,  the  accounting 
procedure  in  each  case  should  follow  two  steps : 

1.  Obtain  all  the  facts  of  the  reorganization  or  merger. 

2.  Make  all  the  necessary  entries  to  record  these  facts. 

In  obtaining  the  facts,  the  accountant  should  not  only  consult  the  rec- 
ords, but  he  should  also  secure  information  from  such  sources  as : 

1.  Minutes  of  board  of  directors. 

2.  Terms  of  merger  agreement. 

3.  Plans  of  reorganization  as  outlined  by  the  promoter  and  the  banks 
that  expect  to  finance  the  reorganization,  etc. 

As  far  as  the  facts  themselves  are  concerned,  the  problem  is  one  of 
valuation,  which  is  preliminary  to  the  problem  of  accounting.  Appraisals 
must  be  made  by  experts,  agreements  are  made  by  directors  and  stock- 
holders, and  reorganizations  are  planned  by  committees  of  creditors  or 
stockholders  and  promoters;  all  of  this  is  done  before  the  accountant  be- 
gins his  work.  Whatever  facts  are  determined,  however,  he  must  take 
these  into  consideration  when  making  his  entries,  so  that  they  will  conform 
to  the  facts. 

In  order  to  illustrate  the  proper  accounting  procedure  in  such  cases,  we 
will  present  three  problems,  one  of  reorganization  and  two  of  mergers,  to- 
gether with  their  solutions.  These  problems  as  stated  before  are  simple 
and  uninvolved  cases. 

PROBLEM  1 

Reorganization  of  a  Corporation.  The  following  problem  is  taken  over 
with  some  modification  from/  a  Massachusetts  C.  P.  A.  examination.    It  is 

BALANCE  SHEET,  Dec.  31,  1921 


Assets  I  Liabilities 


Cash $  12,188.00 

Accounts  Receivable 71,227.00 

Investments 13,950.00 

Inventory 83,312.00 

Fixtures   46,880.00 


$227,557.00 


Accounts  Payable   $62,060.00 

Notes  Payable 60,000.00 

Capital  Stock 50,000.00 

Surplus 55,497.00 


$227,557.00 


Assignment  21,  Page  2 


typical  of  reorganizations,  and  illustrates  well  the  numerous  facts  that 
must  be  considered  in  such  cases. 

A  corporation  with  the  foregoing  balance  sheet  as  at  December  31, 
1921,  is  placed  in  the  hands  of  a  receiver. 

An  examination  of  the  books  discloses  the  following: 

Accounts  Receivable  are  revalued  as  follows: 

Contracted  in  1921 $51,822.00  estimated  to  shrink  $500.00 

"  1920 5,715.00     "  "  "  25% 

"  1919 3,180.00    "  "  "  75% 

"     prior  to  1919 10,510.00  all  bad 

The  investments  were  considered  to  be  of  no  value.    The  inventories 
were  found  to  contain  unsalable  stock  to  the  amount  of  $7,525.00. 

The  fixtures  were  bought  as  follows : 

In  1914 $  5,115.00 

1915 3,002.00 

1916 2,150.00 

1917 17,810.00 

1918 1,005.00 

1919 4,505.00 

1920 6,115.00 

1921 7,178.00 

$46,880.00 


Fixtures  are  estimated  to  last  ten  years,  and  no  depreciation  has 
been  entered  in  the  accounts.  Bills  for  goods  received  amounting  to 
$3,512.00  were  not  included  in  the  Accounts  Payable,  of  $62,060.00.  The 
receiver  decides  to  reorganize  the  business  with  a  capital  stock  of  $125,000 
divided  as  follows:  $50,000.00  common,  and  $75,000.00,  6%  preferred.  He 
offers  the  creditors  75  per  cent  of  their  claims  in  preferred  stock  and  25 
per  cent  in  common  stock.  This  is  accepted  by  creditors  holding  $60,000.00 
worth  of  notes,  and  $40,000.00  worth  of  claims  on  open  accounts.  He 
offers  the  stockholders  in  the  old  corporation  one  share  of  common  stock 
in  the  new  corporation  for  every  two  shares  in  the  old  corporation.  This 
is  accepted  by  all  of  them. 

Prepare  the  following: 

1.  Adjusting  journal  entries 

2.  Adjusted  balance  sheet 

3.  Entries  to  effect  reorganization 

4.  Balance  sheet  of  new  corporation 


Assignment  21,  Page  3 


SOLUTION  TO  PROBLEM  1 
1.  Adjusting  Journal  Entries 

ADJUSTMENTS  TO  BALANCE  SHEET  OF  DEC.  31,  1921. 

Surplus  $14,823.75 

Reserve  for  Bad  Debts 

Accounts  Receivable 

To  write  off  shrinkage  in  Accounts 
Receivable. 


Surplus  $13,950.00 

Investments 

To  write  off  the  investments  which  are 
without  value. 


Surplus  $  7,525.00 

Inventory 

To  remove  from  the  Inventory  Account  the 
unsalable  stock. 


$  4,313.75 
10,510.00 


$13,950.00 


$  7,525.00 


Surplus  $20,082.70 

Reserve  for  Depreciation  $20,082.70 

The  above  entry  is  to  create  a  reserve 
for  depreciation  of  fixtures,  based 
upon  a  life  of  ten  years. 

Purchases  of  fixtures  and  corresponding-  depreciation  are  as  follows : 

Year  Purchased  Cost  Depreciation 

1914 $  5,115.00  $  4,092.00 

1915 3,002.00  2,101.40 

1916 2,150.00  1,290.00 

1917 17,810.00  8,905.00 

1918 1,005.00  402.00 

1919 4,505.00  1,351.50 

1920 6,115.00  1,223.00 

1921 7,178.00  717.80 


$46,880.00  $20,082.70 


Surplus  $3,512.00 


Accounts  Payable 


$3,512.00 


To  bring  on  the  books  the  corresponding 
liability  for  goods  bought  and  included 
in  the  inventory. 

2.  Adjusted  Balance  Sheet 

ADJUSTED  BALANCE  SHEET  Dec.   31,   1921. 


Assets 

Cash 

Accounts  Receivable.  . 

Inventory 

Fixtures  

Deficit 

.  $  12,188.00 

60,717.00 

.   75,787.00 

.   46,880.00 

4,396.45 

Liabilities 

Accounts  Payable  .... 

Notes  Payable 

Reserve  for  Bad  Debts.  . 
Reserve  for  Depreciation 
Capital  Stock 

$65,572.00 

60,000.00 

4,313.75 

20,082.70 

50,000.00 

$199,968.45 

$199,968.45 

i« 

Assignment  21,  Page  4 


3.  Entries  to  Effect  Reorganization 

Notes  Payable $60,000.00 

Accounts  Payable  40,000.00 

Capital  Stock,  Preferred 

Capital  Stock,  Common  

Creditors  are  offered  75  per  cent  of  their  claims  in 
preferred  stock  and  25  per  cent  in  common  stock.  This 
offer  is  accepted  by  the  holders  of  the  notes  payable, 
and  by  $40,000.00  of  the  book  creditors. 

Capital  Stock  (old  company) $50,000.00 

Capital  Stock,  Common  

Surplus  

Stockholders  in  the  old  company  are  offered  one  share 
of  common  stock  in  the  new  company  for  every  two  shares 
which  they  now  hold.  This  offer  is  accepted  by  all 
stockholders. 

4.  Balance  Sheet  of  New  Corporation 


$75,000.00 
25,000.00 


$25,000.00 
25,000.00 


NEW  CORPORATION 

BALANCE  SHEET,   Dec.   31,   1921. 


Assets 

Liabilities 

Cash 

Accounts  Receivable.  . 

Inventory 

Fixtures  (cost).  .  .  . 

.  $  12,188.00 

60,717.00 

.   75,787.00 

.   46,880.00 

Accounts  Payable  ....  $  25,572.00 
Reserve  for  Bad  Debts.  .    4,313.75 
Reserve  for  Depreciation   20,082.70 
Capital  Stock,  Preferred   75,000.00 
Capital  Stock,  Common.  .   50,000.00 
Surplus 20,603.55 

$195,572.00 

$195,572.00 

In  this  problem  you  will  notice  the  facts  that  must  be  considered  first 
by  the  accountant  before  he  makes  his  entries.  Each  item  is  properly 
analyzed  before  it  is  recorded  in  the  books. 

1.  The  shrinkage  in  Accounts  Receivable,  Investments,  and  Inven- 
tory must  be  recorded. 

2.  The  depreciation  of  fixtures  must  be  shown  on  the  books. 

3.  The  Accounts  Payable  Account  must  be  adjusted  to  include  the 
bills  that  have  been  omitted. 


PROBLEM  2 

The  Consolidation  of  Four  Corporations.     The  following  problem  illus- 
trates a  merger  by  consolidation: 

On  July  1,  1922,  the  corporations  as  listed  below  agree  to  consolidate  under  the 
name  of  the  "Southern  Cotton  Products  Company."  The  new  corporation  is  to  have 
an  authorized  capital  stock  of  ?2,000,000.00,  of  which  $1,200,000.00  is  preferred  and 
'  ),000.00  common  stock,  both  classes  having  a  par  value  of  $100.00  per  share. 


Assig:nment  21,  Page  5 


The  stock  is  to  be  distributed  among  the  four  companies  and  the  pro- 
moter as  follows : 

Number  of  Shares 

Preferred  Common 

Edwards  Co 6,000  300 

Franklin  Co 2,500  540 

Goodwin  Co 1,700  300 

Harrison  Co 1,600  300 

T.  S.  Ross,  Promoter 200  200 

To  be  Sold 6,360 

12,000    8,000 


It  is  also  agreed  that  each  of  the  companies  is  to  pay  its  own  liabilities 
before  the  merger  takes  place.  The  asset  and  capital  stock  accounts  of  the 
four  concerns  after  the  creditors  have  been  satisfied  will  have  the  follow- 
ing balances : 

Edwards  Co.  Franklin  Co.  Goodwin^'Co.  [^Harrison  Co. 

Cash $30,000  $24,000  $26,000      $22,000 

Merchandise  120,000  50,000  40,000       30,000 

Equipment  80,000  60,000  50,000       36,000 

Real  Estate  250,000  64,000  30,000       36,000 

Capital  Stock  150,000  180,000  150,000      100,000 

Entries  Necessitated  by  Merger.  The  accounting  work  necessary  to 
carry  out  the  merger  as  set  forth  above  consists  of  two  parts : 

(a)  Entries  for  closing  the  books  of  the  old  companies. 

(b)  Entries  for  opening  the  books  of  the  new  corporation. 


SOLUTION  TO  PROBLEM  2 

(a)  Entries  for  Closing  the  Books  of  the  Old  Companies.  It  is  first 
necessary  to  determine  the  profit  or  loss  realized  by  the  four  concerns  on 
the  sale  of  their  business.  The  following  chart  shows  clearly  how  this 
calculation  is  made,  which  may  be  briefly  expressed  in  the  formula: 

Purchase  Price  —  Net  Worth  =  Capital  Profit  or  Goodwill. 

Edwards  Co.  Franklin  Co.  Goodwin  Co.  Harrison  Co. 

Purchase   Price   $630,000  $304,000  $200,000  $190,000 

minus 

Total  Assets  480,000  198,000  146,000  124,000 


equals 


Capital    Profit    $150,000  $106,000  $  54,000  $  66,000 


Upon  the  basis  of  this  calculation,  the  following  entries  will  be  made 
on  the  books  of  each  company  for  setting  up  the  profit  and  then  closing 
the  books.  You  will  notice  here  that  the  capital  profit  is  not  set  up  as  an 
asset  on  the  books  of  the  selling  corporations.  It  will,  however,  be  set  up 
on  the  books  of  the  new  corporation  as  one  of  the  assets,  since  it  represents 
an  investment  on  their  part. 

Assignment  21,  Page  6 


Closing  Entries  for  Edwards  Company  are  as  follows: 

July  1,  1922  Southern  Cotton  Products  Company.  .   8630,000 

Cash $  30,000 

Merchandise 120,000 

Equipment 80,000 

Real  Estate 250,000 

Surplus  (Profit  on  Sale)  ....  150,000 

Charging  the  Southern  Cotton 
Products  Company  with  value  of 
assets  turned  over,  closing 
asset  accounts. 

July  1,  1922  Preferred  Stock  of  Southern  Cotton 

Products  Company  $600,000 

Common  Stock  of  Southern  Cotton 

Products  Company  30,000 

Southern  Cotton  Products  Company  $630,000 

Closing  Southern  Cotton  Products 

Company's  account,  as  a  result 

of  their  payment  in  full  of 

account  hy  transfer  of  6,000 

shares  of  preferred  and  300  of 

common  stock  of  the  Southern 

Cotton  Products  Company. 

July  1,  1922  Capital  Stock $150,000 

Surplus  480,000 

Preferred  Stock  of  Southern  Cot- 
ton Products  Company $600,000 

Common  Stock  of  Southern  Cotton 

Products  Company  30,000 

Calling  in  old  stock,  and  can- 
celing it,  giving  in  exchange 
the  equivalent  of  4  shares  of 
preferred  and  1-5  share  of  common 
of  the  Southern  Cotton  Products 
Company  stock. 

Since  it  is  impossible  to  give  1/5  of  a  share,  except  when  fractional 
rights  are  issued,  some  arrangement  would  probably  be  made  by  the  offi- 
cials of  the  Edwards  Company  to  dispose  of  the  common  stock  to  certain 
of  the  shareholders  on  a  definite  basis  in  lieu  of  preferred  shares.  As  a 
matter  of  practice,  these  shares  are  usually  surrendered  by  the  old  stock- 
holders direct  to  the  office  or  agents  of  the  new  corporation,  without  hav- 
ing the  stock  of  the  new  concern  come  into  possession  of  the  officers  of  the 
old  concern  for  distribution.  The  entries  are  shown  that  way  merely  for 
analytical  purposes. 

The  closing  entries  for  the  Franklin  Company  are  as  follows: 

July  1,  1922  Southern  Cotton  Products  Company.  .  $304,000 

Cash $  24,000 

Merchandise 50,000 

Equipment 60,000 

Real  Estate 64,000 

Surplus  —  Capital  Profit  ....  106,000 

July  1,  1922     Preferred  Stock,  Southern  Cotton 

Products  Company   $250,000 

Common  Stock  of  Southern  Cotton 

Products  Company   54,000 

Southern  Cotton  Products  Company  $304,000 

Assignment  21,  Page  7 


July  1,  1922  Capital  Stock $130,000 

Surplus  124,000 

Preferred  Stock,  Southern  Cotton 

Products  Company $250,000 

Common  Stock,  Southern  Cotton 

Products  Company 54,000 

The  closing  entries  for  Goodwin  Company  will  be: 

July  1,  1922  Southern  Cotton  Products  Company.  .  $200,000 

Cash $26,000 

Merchandise 40,000 

Equipment 50,000 

Real  Estate 30,000 

Surplus  — Capital  Profit  ....  54,000 

July  1,  1922  Preferred  Stock,  Southern  Cotton 

Products  Company  $170,000 

Common  Stock,  Southern  Cotton 

Products  Company  30,000 

Southern  Cotton  Products  Company  $200,000 

July  1,  1922  Capital  Stock $150,000 

Surplus  50,000 

Preferred  Stock,  Southern  Cotton 

Products  Company $170,000 

Common  Stock,  Southern  Cotton 

Products  Company 30,000 

Surplus  is  debited  with  $50,000.00  instead  of  with  $54,000.00,  because 
the  Goodwin  Company  had  a  $4,000  deficit.  The  net  balance  of  the  Sur- 
plus Account  therefore  is  $50,000.00. 

The  closing  entries  for  the  Harrison  Company  are : 

July  1,  1922  Southern  Cotton  Products  Company.  .  $190,000 

Cash $  22,000 

Merchandise 30,000 

Equipment 36,000 

Real  Estate 36,000 

Surplus  — Capital  Profit  ....  66,000 

July  1,  1922  Preferred  Stock,  Southern  Cotton 

Products  Company  $160,000 

Common  Stock,  Southern  Cotton 

Products  Company  30,000 

Southern  Cotton  Products  Company  $190,000 

July  1,  1922  Capital  Stock $100,000 

Surplus  90,000 

Preferred  Stock,  Southern  Cotton 

Products  Company $160,000 

Common  Stock,  Southern  Cotton 

Products  Company 30,000 


(b)  Entries  for  Opening  Books  of  New  Corporation.  We  are  giving 
here  the  opening  entries  as  they  would  appear  on  the  books  of  the  new 
corporation.  This  is  done  mainly  so  that  you  may  see  how  the  books  of 
both  the  buying  and  selling  concerns  are  affected. 

Assignment  21,  Page  8 


July  1,  1922  Unissued  Preferred  Stock $1,200,000 

Unissued  Common  Stock  800,000 

Capital  Stock  Authorized: 

Preferred  $1,200,000 

Common 800,000 

Setting  up  Authorized  Capital  Stock. 


July  1,  1922  Subscribers  to  Preferred  Capital 

Stock $1,200,000 

Subscribers  to  Common  Capital  Stock    164,000 

Unissued  Preferred  Stock  ....  $1,200,000 

Unissued  Common  Stock 164,000 

Subscriptions  of  the  four  companies 
and  the  promoter. 


I 


July  1,  1922  Cash $   30,000 

Merchandise  120,000 

Equipment  80,000 

Real  Estate  250,000 

Goodwill 150,000 

Edwards  Co.,  Vendors  $  630,000 

July  1,  1922  Cash $   24,000 

Merchandise  50,000 

Equipment  60,000 

Real  Estate  64,000 

Goodwill 106,000 

Franklin  Co.,  Vendors $  304,000 

July  1,  1922  Cash $   26,000 

Merchandise  40,000 

Equipment  50,000 

Real  Estate  30,000 

Goodwill 54,000 

Goodwin  Co.,  Vendors  $  200,000 

July"'l,Ll922  Cash $   23,000 

Merchandise  30,000 

Equipment  36,000 

Real  Estate  36,000 

Goodwill 66,000 

Harrison  Co.,  Vendors $  190,000 

Each  of  the  last  four  compound 
entries  is  to  record  purchase  of 
properties  from  the  vendor 
companies. 


July  1,  1922  Edwards  Co $  630,000 

Franklin  Co 304,000 

Goodwin  Co 200,000 

Harrison  Co 190,000 

Subscribers  to  Preferred  Capital 

Stock $1,180,000 

Subscribers  to  Common  Capital 

Stock 144,000 

Setting  subscriptions  off  against 
open  accounts  of  vendors. 


Assignment  21,  Page  9 


July  1,  1922  Organization  Expense $  40,000 

Subscribers  to  Preferred  Capital 

Stock $  20,000 

Subscribers  to  Common  Capital 

Stock 20,000 

Subscription  of  promoter,  T.  S. 
Ross,  charged  to  organization 
expense,  because  paid  for  in 
service  in  organizing  new 
company. 

July  1,  1922  Subscribers  to  Common  Capital  Stock   $636,000 

Unissued  Common  Stock $  636,000 

Miscellaneous  subscriptions  to 
Common  Stock. 

July  1,  1922  Cash $636,000 

Subscribers  to  Common  Capital 

Stock $636,000 

Miscellaneous  subscriptions  paid  in 
cash. 

The  opening  entries,  as  you  note,  include  the  goodwill  of  the  four  com- 
bining corporations  as  an  asset.  This  is  proper  because  the  new  corpora- 
tion has  bought  this  goodwill.  The  organization  expense  of  $40,000.00  is 
set  up  as  a  deferred  charge  to  be  written  off  during  the  next  few  years. 
This  is  usually  advised  so  that  the  value  of  the  assets  may  not  be  inflated. 
You  will  also  notice  that  preferred  and  common  capital  stock  are  recorded 
in  separate  accounts.  This  should  always  be  done  for  statistical  purposes. 
After  all  the  entries  are  posted,  the  capital  stock  will  appear  in  two  groups 
of  accounts : 

1.  Authorized  Capital  Stock — Common  and  Preferred  credit  balances. 

2.  Unissued  Capital  Stock — Common  and  Preferred  debit  balances. 

There  is  no  account  for  capital  stock  issued.  But  the  amount  of  stock 
issued  or  outstanding  may  be  determined  by  deducting  the  debit  balance 
in  the  Unissued  Capital  Stock  accounts  from  the  credit  balance  in  the 
Authorized  Capital  Stock  accounts.  This  deduction  will  usually  be  shown 
in  the  balance  sheet. 


PROBLEM  3 

Corporation  Merged  by  Absorption.    The  entries  for  a  merger  by  absorp- 
tion consist: 

1.  Of  closing  entries  on  the  books  of  the  old  corporation. 

2.  Of  entries  for  new  assets  and  liabilities  on  the  books  of  the  buying  corpo- 
ration. 

In  such  a  case  assets  are  often  revalued  at  a  lower  amount,  as  in  the 
f  ollo\ving : 

On  December  31,  1921,  the  Walker  Trading  Company  had  total  assets 
of  $150,000.00,  total  liabilities  of  $35,320.00,  capital  stock  issued,  $75,000.00, 

Assignment  21,  Page  10 


and  surplus,  $39,680.00.     It  decides  to  buy  out  the  Smith  Corporation, 
whose  balance  sheet  on  December  31,  1921,  appears  thus: 

SMITH  CORPORATION 

BALANCE  SHEET,  Dec.  31,  1921. 


Cash $  1,500.00 

Accounts  Receivable.  .  .  ,  7,000.00 

Notes  Receivable  3,000.00 

Merchandise 12,000.00 

Building  and  Land 25,000.00 

Fixtures  500.00 


Accounts  Payable $  6,000.00 

Capital  Stock 35,000.00 

Surplus 8,000.00 


$49,000.00 


$49,000.00 


The  terms  of  purchases  are  as  follows : 

1.  Accounts  Receivable  are  valued  at  only  $6,000.00. 

2.  $2,000.00  worth  of  the  merchandise  is  considered  unsalable. 

3.  $500.00  of  the  notes  receivable  and  uncollectible. 

4.  The  Smith  Corporation  value  their  goodwill  at  $10,000.00. 

5.  The  stockholders  of  the  Smith  Corporation  are  to  turn  in  their  stock  and 
receive  $100.00  bonds  from  the  Walker  Trading  Company,  in  return  for 
the  shares  of  stock. 

6.  The  Walker  Trading  Company  agi'ees  to  assume  all  the  liabilities  of  the 
Smith  Corporation,  as  shown  on  the  balance  sheet  of  Dec.  31,  1921. 


SOLUTION  TO  PROBLEM  3 
First  of  all  the  adjusting  and  closing  entries  must  be  made. 

1.  Journal  Entries  are  made  on  the  books  of  the  Smith  Corpora- 
tion thus: 


Dec.  31,  1921  Surplus $3,500.00 

Accounts  Receivable  

Merchandise 

Notes  Receivable 

To  record  the  losses  on  assets. 


Dec.  31,  1921  Walker  Trading  Company  $45,500.00 

Cash 

Accounts  Receivable  

Notes  Receivable 

Merchandise  

Building  and  Land  

Fixtures 


To  close  the  asset  accounts. 


Dec.  31,  1921  Accounts  Payable  

Walker  Trading  Company. 


$6,000.00 


To  close  the  liabilities. 


Dec.  31,  1921  Walker  Trading  Company  $10,000.00 

Surplus  

To  record  the  profit  on  sale  for 
goodwill . 


$1,000.00 

2,000.00 

500.00 


$  1,500.00 

6,000.00 

2,500.00 

10,000.00 

25,000.00 

500.00 


$6,000.00 


$10,000.00 


Assignment  21,  Page  11 


Dec.  31,  1921  Walker  Trading  Company  Bonds  .  .  .  $49,500.00 

Walker  Trading  Company $49,500.00 

To  record  receipt  of  tonds  from 
Walker  Trading  Company. 

Dec.  31,  1921  Capital  Stock $35,000.00 

Surplus 14,500.00 

Walker  Trading  Company  Bonds.  .  $49,500.00 

To  close  the  capital  and  surplus 
accounts,  and  to  show  the  dis- 
tribution of  bonds  among  the 
stockholders  of  the  Smith  Cor- 
poration. 

2.  The  Journal  Entries  on  the  books  of  the  Walker  Trading  Com- 
pany are  also  given  to  make  the  solution  complete : 

Dec.  31,  1921  Cash $  1,500.00 

Accounts  Receivable 6,000.00 

Notes  Receivable  2,500.00 

Merchandise 10,000.00 

Building  and  Land 25,000.00 

Fixtures  500.00 

Goodwill  10,000.00 

Smith  Corporation  $55,500.00 

To  record  the  assets  purchased. 

Dec.  31,  1921  Smith  Corporation $6,000.00 

Accounts  Payable $6,000.00 

To  record  the  liabilities. 

Dec.  31,  1921  Smith  Corporation $49,500.00 

Bonds  Payable  $49,500.00 

To  show  the  issue  of  Bonds. 

Revaluation  of  Assets  in  Case  of  Merger.  When  one  corporation  buys 
out  another,  as  in  the  preceding  problem,  the  buying  corporation  usually 
revalues  the  assets  and  liabilities  that  it  expects  to  take  over.  This  is 
either  done  by  an  appraisal  committee  or  by  an  expert  appraiser. 

For  example,  in  our  illustration  certain  assets  were  revalued  at  a  lower 
amount.  That  is  why  the  book  values  of  the  Smith  Corporation's  assets 
were  corrected  by  the  adjusting  journal  entries.  The  Walker  Trading  Com- 
pany also  accepted  the  revaluation  and  entered  the  assets  on  their  books 
at  the  new  valuation.  Thus  you  see  the  valuation  problem  is  of  consider- 
able importance  in  case  of  mergers,  in  that  it  determines  the  entries  to  be 
made  on  the  books. 

IMPORTANT  POINTS  IN  THIS  ASSIGNMENT 

This  assignment  is  intended  to  give  you  an  introduction  to  the  problems 
of  reorganization  and  mergers  of  corporations. 

The  fuller  treatment  is  reserved  for  later  assignments  on  holding  com- 
panies and  consolidations. 

We  have,  however,  explained  and  illustrated  certain  fundamental  ac- 
counting principles  that  are  applied  in  reorganizations  and  mergers.  These 

Assignment  21,  Page  12 


same  principles  will  appear  later  in  the  more  complicated  cases.    That  is 
why  it  will  pay  you  to  fix  these  principles  in  mind  now. 

For  example,  you  ought  to  master  the  following  points : 

First — In  reorganization  and  mergers,  the  accountant  must  do  two 
things. 

1.  Gather  all  the  facts. 

2.  Make  the  entries,  so  that  they  will  conform  to  these  facts. 

Second — In  reorganization  problems  two  things  must  be  considered. 

1.  Settlement  with  creditors. 

2.  Reorganization  expense. 

Third — In  mergers,  two  conditions  may  exist. 

1.  Merger  by  consolidation. 

2.  Merger  by  absorption. 

Fourth — Goodwill  is  determined  by  deducting  the  net  worth  from  the 
purchase  price. 

Fifth — Goodwill  is  entered  as  a  capital  profit  on  the  books  of  the  sell- 
ing concerns,  and  as  an  asset  on  the  books  of  the  new  corporation. 

With  these  main  points  mastered  you  are  ready  to  set  up  the  solutions 
for  the  following  problems. 


Assignment  21,  Page  13 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  21 

1.  Mr.  Allen  holds  50  shares  of  a  total  issue  of  5,000  shares  in  his 
corporation.  At  the  time  of  combining  with  another  concern  to  form  a 
new  corporation,  goodwill  was  valued  at  $80,000.  How  does  Mr.  Allen 
benefit  from  this  new  asset  of  $80,000?  What  is  the  nominal  amount  of 
his  benefit  in  this  case? 

2.  A  corporation  about  to  consolidate  with  several  others  has  net 
assets  valued  on  the  books  at  $116,000,  capital  stock  being  $90,000.  The 
new  corporation  takes  it  over  at  $140,000.  What  value  apparently  was 
placed  on  goodwill  ?  After  this  goodwill  was  set  up  what  was  the  balance 
of  the  Surplus  Account  just  before  closing  the  books  of  the  old  concern? 
Show  all  calculations. 

3.  A  and  B  are  equal  partners  in  a  trading  concern,  each  having 
invested  $5,000.00  on  January  1,  1921.  On  December  31,  one  of  the 
partners  took  off  the  following  trial  balance  before  closing  the  nominal 
accounts. 


TRIAL  BALANCE— Dec.  31,  1921 
(before  closing) 

Accounts  Debits  Credits 

Cash   $      790.00 

Furniture  and  Fixtures 1,230.00 

Delivery  Equipment  2,595.75 

Notes  Receivable  1,494.25 

Building  9,000,00 

W.  Miller 200.00 

F.  Taylor  „ 300.00 

A  Capital  $  5,000.00 

B  Capital  5,000.00 

S.  T.  Owens _ 100.00 

L.  Wright  _ 50.00 

New  York  Supply  Company  1,910.00 

Purchases 8,500.12 

Sales  9,704.22 

Expenses  „ 2,654.10 

Mortgages  Payable  .— 5,000.00 

$26,764.22  $26,764.22 


Before  the  balance  sheet  and  profit  and  loss  statement  can  be  prepared, 
the  following  items  should  be  considered : 

Inventory  Dec.  31,  1921 $4,000.00 

Accrued   Interest  Receivable —  40.00 

Allowance  for  Depreciation: 

For  Furniture   &   Fixtures 120.00 

For  Delivery    Equipment 400.00 

For  Building  _ 225.00 

Unexpired  Insurance  - 175.00 

(a)  Make  adjusting  journal  entries  preparatory  to  closing  the 
books. 

(b)  Set  up  the  balance  sheet  and  profit  and  loss  statement. 

4.  On  January  2,  1922,  the  A  &  B  partnership,  described  in  problem  3, 
agreed  to  consolidate  with  C  Company  under  the  name  of  E  Company. 

Assignment  21,  Page  14 


The  C  Company's  balance  sheet  appeared  as  follows: 

C  COMPANY 

BALANCE  SHEET,  Dec.   31,   1921 


Assets 

Cash $  2,000.00 

Accounts  Receivable: 

Lynn  &  Co.  .  .  $400.00 

James  &  Co.  .  .  500.00    900.00 

Building  15,000.00 

Merchandise 9,000.00 

Goodwill  2,000.00 

$28,900.00 


Liabilities  and  Capital 
Accounts  Payable: 


J.  Ross  &  Co. 
Wright  &  Co.  . 

.  .  $500.00 

.  .  700.00  $  1,200.00 

Capital  Stock  .  . 
Surplus   .  . 

20,000.00 

7,700.00 

$28,900.00 

The  E  Company  is  to  have  an  authorized  capital  stock  of  $60,000.00  of 
the  par  value  of  $100.00  per  share. 

It  gives  200  shares  of  the  stock  for  the  business  of  A  &  B  partnership 
as  valued  on  the  books  of  the  latter,  Dec.  31,  1921,  after  the  books  have 
been  adjusted. 

It  gives  300  shares  of  the  stock  for  the  business  of  the  C  Company  as 
it  existed  Dec.  31,  1921,  as  shown  by  its  balance  sheet. 

(a)  Set  up  all  the  journal  entries  necessary  to  close  the  ledger  of  the 
partnership  A  &  B  in  connection  with  the  sale  of  the  business. 

(b)  Prepare  all  journal  entries  necessary  to  close  the  books  of  the  C 
Company  in  connection  with  the  sale  of  their  business. 

(c)  Prepare  all  journal  entries  necessary  to  open  the  books  of  the  E 
Company,  providing  controlUng  accounts  for  customers  and  creditors. 

(d)  Prepare  balance  sheet,  in  proper  form,  of  the  E  Company,  after 
the  entries  under  (c)  are  considered. 


. 


Assigrnment  21,  Page  15 


Higher  Accountancy 

oi  -jg 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 

Assignment  22 

THE  VOUCHER  SYSTEM 


"X  ^AN  efficiency  is  to-day  of  far  greater  importance 
"*■  -*■  than  the  further  development  of  efficiency  in 
machinery.  The  greatest  problem  before  us  to-day  is  not 
so  much  the  further  improvement  of  machinery  as  the 
development  of  an  increased  efficiency  in  men. 

JAMES  LOGAN 

Chairman  of  the  Board  and  General  Manager 
of  the  United  Stales  Envelope  Company 


LaSalle  Extension  University 

Chicago 


NHA-22 
U-1S2) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 


THE  VOUCHER  SYSTEM 

A  manufacturing  corporation  of  the  middle  west  grew  so  large  that 
the  accounting  department  found  it  necessary  to  adopt,  from  time  to 
time,  various  timesaving  devices  in  the  keeping  of  its  records. 

The  chief  accountant  had  already  introduced  special  journals  for  pur- 
chases and  sales  as  well  as  a  columnar  cash  book  and  controlling  accounts. 
These  journals,  of  course,  saved  considerable  time  by  eliminating  a  large 
amount  of  detail  posting  which  would  otherwise  have  been  necessary. 

As  the  number  of  customers  grew  larger,  it  was  also  decided  to  break 
up  the  subsidiary  sales  ledger  alphabetically  into  three  parts,  so  that  the 
work  of  posting  could  be  handled  by  three  clerks.  This,  of  course,  necessi- 
tated three  controlling  columns  in  the  sales  book  and  cash  book.  Such 
an  arrangement  took  care  of  the  increased  sales.  As  the  production  of  the 
concern  grew  larger,  purchases  of  materials  and  supplies  also  increased. 
The  company  found  it  necessary  to  bu}^  materials  and  supplies  from  a 
larger  number  of  creditors.  Many  of  these  purchases  were  for  small 
amounts,  and  most  of  them  were  paid  within  30  days'  time.  In  fact,  there 
were  over  150  active  creditors'  accounts  in  the  ledger,  most  of  which 
remained  open  only  for  a  very  short  time. 

Besides,  the  ledger  contained  almost  twice  as  many  closed  accounts 
with  old  creditors  from  whom  the  company  was  no  longer  making  pur- 
chases. The  result  was  that  the  general  ledger  was  gradually  becoming 
overcrowded  with  a  large  number  of  such  accounts. 

This  increase  in  the  number  of  purchases  affected  not  only  the  ledger 
but  also  the  purchase  journal.  The  purchase  journal  which  had  been  in 
use  up  to  this  time  was  found  to  be  inadequate.  The  trouble  was  it 
was  designed  to  take  care  only  of  purchases  of  material  and  supplies  on 
account.  All  other  purchases  on  account,  such  as  the  purchase  of  equip- 
ment, of  office  supplies,  gasoline,  tires,  and  many  other  similar  expendi- 
tures, had  to  be  entered  in  the  general  journal  and  this  involved  a  great 
amount  of  detail  posting.  Small  bills  for  telephone,  coal,  electric  Hght, 
etc.,  were  not  recorded  when  they  were  received.  They  were  merely  filed 
and  then  entered  directly  in  the  cash  book  when  paid. 

Putting  it  briefly,  the  problem  that  confronted  the  accounting  depart- 
ment was  to  devise  some  means  of  handling  all  purchases  on  account  in  a 
more  effective  way,  so  that  the  needs  of  the  growing  business  would  be 
met  efficiently.  After  studying  the  situation  carefully,  the  crief  account- 
ant authorized  the  introduction  of  the  so-called  "voucher  system." 

The  Voucher  System.  The  voucher  system  is  a  method  of  approving, 
recording,  and  distributing  all  expenditures  which  give  rise  to  accounts 
payable.  The  term  expenditures  includes  not  only  purchases  of  material 
and  supplies,  but  also  purchases  of  fixed  assets,  such  as  machinery,  deliv- 
ery equipment,  and  real  estate,  etc.    It  also  includes  all  items  of  expense, 

NHA-22 
11-152 


which  are  not  generally  thought  of  as  purchases,  such  as  rent,  insurance, 
telephone,  wages,  etc.  In  other  words,  the  voucher  system  expands  the 
ordinary  purchase  journal  into  a  record  which  contains  every  expenditure 
creating  an  account  payable.  The  purchase  journal  proper  is  not  designed 
to  take  care  of  all  such  purchases.  It  is  restricted  to  purchases  of  mate- 
rials or  merchandise.  The  expansion  of  the  purchase  journal,  so  as  to 
include  all  expenditures,  necessitates  the  use  of  additional  columns  for 
expense  and  asset  distributions.  This  expanded  journal  is  called  the 
voucher  register,  illustrated  in  Figure  4. 

The  voucher  system  includes  more  than  the  voucher  register,  however. 
It  provides  an  actual  approval  on  each  bill  or  invoice  presented  by  the 
creditor.  Before  entries  are  made  in  the  register,  every  purchase  is 
recorded  on  a  voucher  which  is  made  out  for  each  creditor.  Payment  of 
this  voucher  is  then  authorized  by  the  financial  officer  and  it  is  filed  for 
payment  according  to  the  terms  of  the  purchase.  As  soon  as  the  voucher 
is  approved  it  is  recorded  in  the  register  mentioned.  This  does  away  with 
the  creditors'  accounts  in  the  general  ledger.  Instead  of  having  an  account 
for  each  creditor,  there  is  a  voucher  for  each  creditor,  covering  his  indi- 
vidual bills  or  invoices.  Since  the  voucher  is  made  out  before  the  amount 
is  entered  in  the  voucher  register,  we  shall  describe  the  voucher  first. 

The  Voucher  Defined  and  Explained.  In  a  broad  sense,  a  voucher  is  a 
statement  which  certifies  or  verifies  the  correctness  of  a  transaction. 
Any  document  which  sufficiently  identifies  a  payment,  a  credit,  or  a 
charge  to  the  proper  person  m.ay  be  called  a  voucher.  Under  the  voucher 
system,  however,  the  voucher  is  a  more  or  less  formal  document  which 
shows  that  a  particular  bill  of  items  has  been  paid,  or  is  to  be  paid. 

A  separate  voucher  is  not  made  up  for  each  purchase  invoice,  but 
all  the  invoices  to  be  paid  to  a  creditor  for  a  definite  period  are  assem- 
bled into  one  voucher.  For  example,  the  voucher  illustrated  in  Figure  1 
is  for  three  invoices  from  Adams  &  Ellinger.  The  voucher  is  usually 
typed  in  duplicate  or  triplicate,  to  meet  the  needs  of  the  office.  In  the 
particular  voucher  illustrated,  the  original  is  called  a  voucher  check, 
because  it  is  a  voucher  with  the  check  attached.  The  duplicate  is  called 
the  office  voucher,  to  which  are  attached  the  invoices  it  covers.  On  the 
back  of  this  copy  are  written  the  amounts  to  be  paid  and  the  accounts 
to  be  charged.  The  triplicate,  when  used,  is  for  filing  under  the  name 
of  the  creditor. 

The  Voucher  Check.  The  voucher  check,  as  given  in  Figure  1,  con- 
sists of  two  parts,  the  voucher  and  the  attached  check.  The  check  is 
very  much  like  the  ordinary  bank  check,  only  it  is  attached  to  the  voucher. 
When  the  check  is  properly  signed  and  recorded  in  the  check  register, 
illustrated  in  Figure  5,  the  voucher  check  is  folded  and  mailed  to  the  party 
from  whom  the  purchase  was  made.  When  the  voucher  check  is  received, 
it  is  deposited  at  the  creditor's  bank. 

There  is  considerable  objection  to  this  method  because  it  often  gives 
too  much  publicity  to  the  transactions  for  which  the  check  is  issued,  and 
this  is  undesirable.  Moreover,  banks  object  to  the  folded  voucher  checks 
since  they  are  inconvenient  to  handle.  To  eliminate  these  objections,  the 
voucher  check  is  now  usually  provided  with  perforations  between  the 

Assignment  22,  Page  2 


check  and  the  voucher,  as  illutrated  in  Figure  1,  so  that  the  payee  can 
detach  the  voucher  before  depositing  the  check.  i?he  detached  voucher  is 
then  filed,  as  the  basis  for  the  entry  of  the  remittance  on  the  creditor's 
books. 


THE  SMITH  MOTOR  COMPANY 
Chicago,  Illinois 


Voucher  Nn  ,54 
Check  No.     ^0 


Pay  to  the  Order  of: 

Adams  and  Ellinger 


Date. 


Jan.   18 


joii] 


384.75 


To  the  FIRST  NATIONAL  BANK 

Chicago,  Illinois 


The  Smith  Motor  Company 
yty        H.  L.  Woods 


Detach  before  depositing  check 


Date 


Your 
Invoice 

No. 


Description 


Amount 

of 
Invoice 


Cash 
Discount 


Freight 


Net 
Amount 


I/I7/22 
1/15/22 
1/17/22' 


284 
362 
431 


Motor  Parts 

Castings 

Suppl ies 

Totals 


82 

110 

200 
392 


— T — 

80     36 


108 

196 
384 


The  attached  check  is  in  full  payment  of  the  above  items  and  your  indorsement  will  be 
considered  an  acceptance  as  such. 

If  correct,  detach  statement  for  your  reference. 

If  incorrect,  return  check  explaining  difference.      _  THE  SMITH  MOTOR  COMPANY 
Chicago,  IlHnois 


The  Voucher  Check 
Figure  1. — The  above  voucher  check  is  sent  to  the  creditor  in  payment  of  account.  On 
the  back  of  the  check,  there  i.s  printed  in  a  blank  space  provided  for  the  indorsement, 
some  such  phrase  as:  "The  indorsement  of  this  check  will  be  considered  an  acceptance 
in  full  pajTnent  for  invoices  covered  by  it."  The  amount  of  the  check  is  typed  in  fignres, 
but  may  also  be  written  with  a  check  protectograph. 

The  Office  Voucher.  The  duphcate  form  of  the  voucher  is  the  office 
voucher,  shown  in  Figure  2.  On  the  back  of  this  voucher  the  account 
distribution  is  provided,  as  ilhistrated  in  Figure  3.  From  the  invoices  or 
papers  attached,  the  voucher  clerk  will  record  on  the  reverse  side  the 
aniounts  to  be  charged  to  each  account. 

Let  us  suppose,  for  example,  that  we  have  received  a  tax  bill  for  taxes 
on  real  estate.  This  bill  is  vouchered  in  the  manner  explained.  Assume 
that  an  accrued  liability  had  been  set  up  for  these  taxes  monthly  by  debit- 
ing Taxes  Expense  and  crediting  Accrued  Taxes  Payable  with  1/12  of  the 
estimated  yearly  taxes.     The  account  distribution  on  this  voucher  would 


Assignment  22,  Page  3 


show  a  debit  to  Accrued  Taxes  Payable  and  a  credit  to  Vouchers  Payable. 
Ill  case  the  tax  bill  is  more  than  the  estimate,  then  an  adjusting  journal 
entry  should  be  made  debiting-  Capital  or  Surplus  and  crediting  Accrued 
Taxes  Payable  with  the  difference  between  the  estimated  amount  and 
amount  of  the  bill.  Surplus  is  debited  because  the  monthly  charges  for 
taxes  had  been  too  small,  and  this  resulted  in  overstating  profits  for  the 
previous  year,  which  had  been  carried  to  Surplus. 

You  will  observe  that  there  is  a  complete  double  entry  on  this  voucher, 
because  Vouchers  Payable  is  credited  with  the  total  amount  of  the  items 
debited  to  various  expense  accounts. 


THE  SMITH  MOTOR  COMPANY                   VobcherNo.  54 

Chicago,  Illinois 

Jan.   18,   1922 

Pay  to  the  Order  of: 

Adams  and  Ellinger                                                   $  384.75 

Date 

Your 

Invoice 

No. 

Description 

Amount 

of 
Invoice 

Cash 
Discount 

Freight 

Net 
Amount 

1/12/22 

284 

Motor  Parts 

82 

00 

1 

64 

80 

36 

1/15/22 

362 

Castings 

110 

60 

2 

21 

108 

39 

1/17/22 

431 

Supplies 

200 

00 

4 

00 

196 

00 

Total 

392 

60 

7 

85 

384 

75 

Prices  0.  K.'dby. 

_  ■pi«frihut"^n  ^^y  _. 

Extensions  Check 

pd  hy                                           ,  _Entf*rH  in  V^   Rpor  hv 

F,Y.iminPfl  hv 

.  m  \r>r>rr,\ri^r\   Vwr 

Auditor 

Carbon  Copy  of  Voucher  Check 

Figure  2. — The  above  voucher  is  a  carbon  copy  of  the  voucher  check,  to  which  all  invoices 
are  attached  and  distribution  made  on  the  reverse  side,  as  shown  in  Figure  3. 

Vouchers  Should  Be  Numbered  Consecutively.  After  the  bills  have 
been  verified  and  the  distribution  properly  recorded  on  the  voucher,  the 
voucher  is  given  a  number  and  passed  to  the  accountant  for  approval.  It 
is  then  recorded  in  the  voucher  register.  Vouchers  should  be  numbered 
consecutively.  They  should  also  be  entered  numerically  in  the  voucher 
register. 


Assignment  22,  Page  4 


Vniif>hpr  NTn          54 

w 

Q 

g 

Account 

Acct. 
No. 

n 

T^„^-      January  18,   1922 

Amount 

Adams  &  El  linger 

Telephone  and  Teleg. 

Toledo,   Ohio 

Vouchers  Payable 

rv          392.60 

Stationery  and  Printing 

PfliHhvChPr^l'  Vn            10           r»nfP    1/18/22 

Misc.  Expenses 

DEBITS 

Account 

Acct. 
No. 

Amount 

Raw  Materials 

392 

60 

Freight  and  Cartage  In 

Direct  Labor 

Indirect  Labor 

Factory  Supplies 

Repairs  to  Factory  Equip 

Heat,  Light,  and  Power 

Misc.  Factory  Expenses 

Salesmen's  Salaries 

Traveling  Expenses 

Advertising 

Freight  and  Cartage  Out 

Misc.  SelHng  Expense 

Office  Salaries 

Office  Supplies 

Reverse  Side  of  Voucher 
Figure  3. — Account  distribution  is  made  on  the  reverse  side  of  the  voucher,  and  all 
papers  or  invoices  are  stapled  to  voucher.    The  voucher  is  then  recorded  in  the  Voucher 
Register.    After  payment  is  made,  the  voucher  is  folded  and  filed  in  a  drawer  in  numer- 
ical order  by  voucher  number  for  future  reference. 

Assignment  22,  Page  5 


One  method  of  numbering  vouchers  is  to  prefix  the  number  of  the 
month  to  the  voucher  number  and  begin  a  new  set  of  numbers  each  month. 
For  example,  August  is  the  eighth  month.  Therefore,  the  figure  8  is  pre- 
fixed to  the  voucher  numbers.  Thus  801  to  899  would  be  the  voucher 
numbers  to  be  used  consecutively  for  vouchers  issued  during  the  month 
of  August ;  901  to  999,  for  the  month  of  September,  and  so  on.  With  this 
method,  the  voucher  number  will  indicate  in  which  month  the  voucher 
was  issued. 

Form  of  the  Voucher  Register.  The  voucher  register  or  the  vouchers 
payable  register,  as  it  is  sometimes  called,  is  the  book  of  original  entry 
in  which  the  voucher  and  its  distribution  is  recorded.  This  register  is  a 
journal  so  far  as  its  scheme  of  debits  and  credits  is  concerned.  As  men- 
tioned before,  it  is  the  purchase  journal  in  expanded  form.  It  usually 
has  columns  for: 

Date. 

Name  of  creditor  or  description  of  entry. 

Voucher  number. 

Vouchers  payable,  in  which  total  amount  of  each  voucher  is  entered. 

Check  number  and  date  of  payment. 

Distribution. 

There  will  be  as  many  columns  for  the  distribution  of  charges  as  the 
requirements  of  the  business  demand.  If  there  are  many  items  to  be 
charged  to  the  same  account  during  the  month,  a  column  should  be  pro- 
vided for  that  account,  so  that  the  total  of  that  column  may  be  posted 
at  the  end  of  the  month.  If  there  are  only  one  or  two  charges  to  an 
account  during  the  month,  it  will  not  be  worth  while  to  provide  a  separate 
column  for  the  account.  Such  items  would  be  entered  in  a  general  ledger 
or  sundries  column  and  posted  separately  to  the  account  in  the  general 
ledger.  These  separate  postings  are  made  currently,  that  is,  before  the 
totals  are  posted. 

The  voucher  register,  therefore,  has  various  forms  and  rulings  for 
diff'erent  businesses.  This  is  due  to  the  fact  that  the  information  desired 
is  seldom  the  same  in  any  two  businesses.  The  form  illustrated  in  Figure 
4  is  typical  of  what  is  being  used. 

As  you  examine  the  voucher  register  and  the  check  register  forms  of 
Figures  4  and  5,  you  will  notice  broken  lines,  which  indicate  that  certain 
transactions  have  been  omitted.  Ordinarily  each  sheet  would  be  totaled 
daily  and  the  footings  carried  forward  to  the  following  page,  so  that  the 
totals  on  the  last  page  would  represent  the  total  transactions  for  the 
month. 

Often  the  size  of  a  voucher  register  can  be  reduced  by  having  a  short 
flyleaf  inserted  between  the  right-hand  and  the  left-hand  side  of  the  sheet. 
Columns  are  ruled  on  this  flyleaf  for  accounts,  as  required.  Such  an 
arrangement  is  convenient  when  the  voucher  register  is  in  the  loose-leaf 
form. 

Effect  of  the  Voucher  System  on  the  Cash  Disbursements  Book  or 
Check  Register.  When  the  voucher  system  is  not  used,  the  cash  disburse- 
ments book,  or  check  register,  as  it  is  often  called,  would  contain  numerous 
columns  for  various  classes  of  expenses.     One  of  the  advantages  of  the 

Assignment  22,  Page  G 


voucher  system  is  that  the  check  register  is  reUeved  of  this  detail  account 
distribution.  All  cash  paid  out  is  entered  in  the  total  column  of  the  cash 
book  and  these  items  are  entered  in  the  voucher  register  in  a  special  column 
for  payments.     You  should  bear  in  mind  that  under  the  voucher  system — 

All  payable  items  of  every  nature  and  description  are  to  be  entered  in 
the  voucher  register  as  a  credit  to  "Vouchers  Payable"  and  are  to  be  dis- 
tributed to  the  proper  expense  accounts  or  balance  sheet  accounts. 

Illustration  of  Voucher  System.  We  shall  now  take  a  practical  case 
and  trace  some  of  the  transactions  of  the  Smith  Motor  Company  into  the 
voucher  register.  It  will  not  be  necessary  to  show  all  transactions,  but 
enough  typical  transactions  will  be  shown  to  make  clear  how  the  voucher 
system  is  installed  and  operated. 

The  Smith  Motor  Company  makes  motors.  Most  of  the  parts  are 
purchased  from  other  concerns,  so  that  the  manufacturing  consists  chiefly 
in  the  assembling  of  these  parts  into  the  complete  motor. 

This  company  was  using  a  purchase  journal  and  had  on  its  ledger 
numerous  accounts  with  creditors.  Furthermore,  the  cash  disbursements 
record  had  become  very  unwieldy  because  expenses  were  necessarily  clas- 
sified in  it.  Then,  too,  expenses  were  incurred  on  account  in  one  month 
and  no  record  was  made  of  them  until  they  were  paid,  perhaps  30  days 
later.  It  was  decided  on  January  1,  1922,  to  adopt  the  voucher  system 
so  that  the  creditors'  accounts  could  be  eliminated  from  the  general 
ledger,  and  expenses  could  be  properly  apportioned  to  the  month  to 
which  they  belonged.  In  this  way,  the  distribution  for  all  payments  were 
centered  in  the  voucher  register. 

How  the  Voucher  System  Is  Started.  Since  the  voucher  system  does 
away  with  creditors'  accounts  in  the  general  ledger,  the  place  to  begin 
is  with  these  accounts. 

On  December  31,  1921,  the  Smith  Motor  Company  had  45  creditors' 
accounts  on  its  general  ledger,  with  a  total  credit  balance  of  $32,510.00. 
Since  it  was  decided  to  use  the  voucher  system,  the  accountant  closed 
the  Accounts  Payable  accounts  by  debiting  each  creditor's  account.  Then 
he  made  out  one  voucher  for  each  creditor,  attached  to  his  voucher  the 
invoices  due  each,  and  filed  the  vouchers  numerically. 

From  these  vouchers  he  made  entries  in  the  voucher  register,  as  shown 
under  date  of  January  3,  1922.  We  show  the  entries  only  for  vouchers 
Nos.  1,  2,  and  3. 

Karry  Ellis $  800.00 

Adams  &  Ellinger  1,125.50 

Brown  &  Company 375.50 

You  understand,  of  course,  that  similar  entries  were  made  for  all  the 
other  creditors.  The  three  entries  are  sufficient  to  show  you  how  to  start 
the  voucher  system  and  make  entries  in  the  voucher  register.  Observe 
especially  the  debits  and  credits  for  these  three  creditors  in  the  voucher 
register.  The  credits  are  entered  in  the  vouchers  payable  column  and 
the  debits  are  entered  in  the  general  ledger  column,  and  posted  as  debits 
to  the  Accounts  Payable  Account.     The  debits  are  placed  in  the  general 

Assignment  22,  Page  7 


VOUCHER  REGISTER 

Date 
1922 

NAME 

Voucher 
No. 

CREDIT           PAID 

DEBITS 

1 

MANUFACTURING 

Vou.'h,T3 

I*a.\able 

1 

■lioc 
No. 

^    Dale 

Raw 

Materials 

Freight 

and 
Cartage 

Direct 
Labor 

Indirect 
Labor 

Factory 
.Supplies 

Repairs 

to 
Machy. 

and 
Equip. 

Heal. 

Light, 
Power 

Mise. 
Factory 
Expenses 

Jan 

3 

Harry  Ellis 

1 

800 

00 

1 

1/3/22 

r^ 

3 

Adams  and  El  linger 

2 

1,125 

50 

2 

1/3/22 

Oi 

3 

Brown  &  Co. 

3 

375 

^0 

3 

1/3/22 

4 

C.&  N.W.RR.Co 

46 

47 

50 

4 

1/4/22 

4 

H.D.Bartlett,  &  Co. 

47 

1,185 

25 

1,185 

25 

5 

J.   H.   Rastall 

48 

121 

35 

7 

1 '14/22 

121 

35 

7 

Factory  Pay  Roll 

49 

5,814 

00 

5 

1/7/22 

4,175 

25 

1,638 

75 

11 

Jacob  Eauer 

50 

187 

50 

8 

1/14/22 

187 

50 

13 

Corry  Coal  Co. 

51 

1,950 

00 

1,950 

'do 

14 

Factory  Pay  Roll 

52 

4,451 

50 

6 

1/14/22 

3.93,g 

10 

516 

40 

16 

N.  Y.   Central  R.   R, 

53 

87 

20 

9 

1/16/22 

87 

20 

V 

Adams  &  El  linger 

54 

392 

60 

10 

1/18/22 

392 

60 

19 

Office  Pay  Roll 

55 

2,550 

00 

11 

1/19/22 

19 

Petty  Cash 

56 

109 

00 

12 

1/19/22 

37 

85 

16 

45 

8 

20 

20 

Joseph  Duncan 

57 

1,470 

00 

13 

1/20/22 

r^ 

L—^-. 

^_^__ 

0| 

4 

^ 

^-^^^ 

y 

b^ 

. — --.^ 

^ 

r~i 

r— 

28 

Factory  Pay  Roll 

78 

4,591 

50 

24 

1  28/22 

3,673 

35 

918 

15 

31 

Accrued  Pay  Roll 

79 

512 

00 

415 

25 

96 

75 

31 

Office  Pay  Roll 

80 

2,550 

00 

25 

1/31/22 

Totals 

49,872 

66 

12.760 

60 

1,185 

15 

15,870 

50 

5,310 

10 

810 

00 

415 

00 

2,182 

50 

22 

25 

. 

' 

~ 

~ 

Figure  4. — Voucher  Register — left-hand  side  of  sheet. 
Assignment  22,  Page  8 


VOUCHER  REGISTER 

' 

Page  No.  1 

Month  nf           Jan-                10 

12 

DEBITS 

SELLING  EXPENSES 

ADMINISTRATIVE  EXPENSES 

GENERAL  LEDGER 

Salesmen's 
Salaries 

Traveling 
Expense 

Adver- 
tising 

Freight 
and 

Cartage 
Out 

Misc. 
Sellinp 
Expenses 

Office 
Salaries 

Office 
Supplies 

Telephone 

and 
Telegraph 

Stationer}' 

and 
Printing 

Misc. 
Expenses 

Account 

Folio 

Amount 

^ 

Accts.   Pay 

22 

800 

00 

xj 

M 

,22 

1,125 

50 

•1           II 

,22 

375 

50 

47 

50 

1,800 

00 

750 

00 

12 

00 

5 

80 

3 

50 

< 

40 

17 

60 

3 

20 

^ 

Buildings 

3 

1,470 

00 

rJ 

- 

^ 

. 

— 

_ 

N    J*  —  ^^ 

-^^ 

r~~-~^ 

=^ 

"N       ^""1 

T-^L.^ 

L 

"     ■- 



■ 

^ 

v., 

^ 

1,800 

00 

750 

00 

3,600, 

00 

228 

30 

55 

75 

113 

86 

334 

50 

1,500 

00 

88 

75 

11 

20 

34 

10 

28 

85 

5,321 

35 

' 

Figure  4. — Voucher  Register — right-hand  side  of  sheet. 

Assignment  22,  Page  9 


CHECK  REGISTER 


Month  of. 


Jan. 


19JL^ 


Dale 

19^2 


Favor  of 


Remarks 


Voucher 
No. 


DEBIT 


Vouchers 
Payable 


CREDITS 


Cash 
Discount 


Purchaise.s 


Cash  Withdrawals 


Check 
No. 


Jan. 


Harry  Ellis 


800 


00 


16 


00 


Adams  and  El  1 inger 


Brown  &  Co. 


1,125 


50 


22 


50 


375 


50 


50 


C     &  N.   W.   R.   R.   Co. 


46 


47 


50 


Factory  Pay  Rol 1 


49 


5,814 


00 


Factory  Pay  Roll 


52 


4,451 


50 


14 


J.  H.  Rastall 


48 


121 


35 


14 


Jacob  Bauer 


50 


187 


50 


75 


N  Y-  Central  R.  R.  Co. 


87 


20 


Adams  and  Ellinger 


54 


392 


60 


85- 


10 


19 


Office  Pay  Roll 


55 


2,550 


00 


Petty  Cash 


56 


109 


00 


Joseph  Duncan 


57 


1,470 


00 


13 


28 


Factory  Pay  Roll 


78 


4,591 


50 


24 


31 


Office  Pay  Roll 


80 


2,550 


00 


25 


Totals 


43,810 


382 


05 


Assignment  22,  Page  10 


FiftUre  5. —  Ihe  Cneck  Reg;ister. 


ledger  column,  because  there  is  no  column  in  the  register  for  the  Accounts 
Payable  Account. 

How  the  Voucher  System  Is  Operated.  Now  that  the  voucher  regis- 
ter has  been  opened,  we  are  prepared  to  enter  the  transactions  for  Jan- 
uarj^  This  we  have  done  in  part  in  the  voucher  register  of  Figure  4  and 
the  check  register  of  Figure  5. 

The  following  transactions  have  been  properly  entered.  Trace  each 
transaction  into  the  forms  and  note  how  they  are  recorded.  In  each 
case  it  is  assumed  that  vouchers  and  voucher  checks  are  first  prepared 
for  the  transactions  similar  to  the  forms  illustrated  in  Figures  2  and  3. 
Then  the  entries  are  made  from  the  vouchers. 


TRANSACTIONS  TO  BE  ENTERED  IN  THE  VOUCHER  REGISTER 

AND  CHECK  REGISTER 

January  3,  1922 

In  order  to  take  advantage  of  a  2  per  cent  discount,  the  invoices  were 
taken  out  of  file  and  paid. 

12/26/21,  Harry  Ellis $  800.00 

12/27/21,  Adams  &  Ellinger  1,125.50 

12/30/21,  Brown  &  Company 375.50 

The  voucher  checks  were  approved  for  payment  and  recorded  in  the 
check  register. 

January  4 

Voucher  No.  46,  to  Chicago  &  Northwestern  Railway  Company,  for 
$47.50,  freight  on  goods  shipped,  was  issued  and  approved  for  payment. 
(Entry  in  voucher  register  and  check  register.) 

Goods  received  and  invoice  for  $1,185.25,  net  30  days,  from  H.  D. 
Bartlett  &  Company,  for  motor  parts.  Voucher  No.  47  was  issued,  but 
put  in  the  unpaid  file  to  be  paid  at  a  later  date.  (Entry  in  voucher 
register  only.) 

January  5 

One  hundred  tons  of  coal  @  $6.50  per  ton  delivered  by  the  Corry  Coal 
Company.    Invoice  placed  in  file  to  be  vouchered  later  in  the  month. 

Invoices  from  J.  H.  Rastall  for  $87.50  and  $33.85,  for  factory  supplies 
shipped,  were  vouchered  on  voucher  No.  48  and  approved  for  payment. 
(Entry  in  voucher  register  and  check  register.) 

Assignment  22,  Page  11 


January  7 
Factory  pay  roll  for  the  week,  as  follows: 

Direct  Labor  $4,175.25 

Indirect  Labor  1,638.75 


$5,814.00 


Voucher  No.  49  was  issued  and  check  cashed  at  the  bank.  The  cash 
is  used  to  pay  off  the  men.  (Entry  in  voucher  register  and  check  register.) 
Note  especially  the  distribution  in  the  columns  for  direct  labor  and  indirect 
labor. 

The  voucher  check  is  also  recorded  in  the  check  register  as  you  will 
observe,  but  note  that  the  check  number  is  5  and  the  voucher  number  is 
49.  The  check  number  may  not  always  be  the  same  as  the  voucher  num- 
ber. The  voucher  checks,  as  they  are  approved  for  payment,  are  recorded 
consecutively  by  check  number  in  the  check  register.  Thus,  we  have  a 
complete  cross  reference  between  the  check  number  and  voucher  number 
when  the  date  and  check  number  is  recorded  in  the  voucher  register  in 
the  line  in  which  the  voucher  entry  was  formerly  made. 

January  11 

Voucher  No.  50,  issued  for  invoices  received  from  Jacob  Bauer,  for 
factory  supplies,  terms,  2  per  cent  10  days,  amount,  $187.50.  (Entry  in 
voucher  register.) 

January  13 

Two  hundred  tons  of  coal  @  $6.50  per  ton,  delivered  by  the  Corry 
Coal  Company,  Voucher  No.  51  issued  to  cover  invoices,  including  pre- 
vious delivery  of  100  tons,  total  $1,950.00. 

January  14 
Factory  pay  roll  for  the  week,  as  follows : 

Direct  $3,935.10 

Indirect  Labor  516.40 


$4,451.50 


Voucher  No.  52  is  issued  and  voucher  check  is  cashed  at  the  bank. 
The  money  is  then  put  up  in  envelopes  and  paid  out  to  the  workmen. 
(Entry  in  voucher  register  and  check  register.) 

The  following  vouchers  were  taken  out  of  the  unpaid  file,  approved  for 
payment,  and  recorded  in  check  register: 

■      Voucher  No.  48     J.   H.   Rastall $121.35 

Voucher  No.    50     Jacob  Bauer 187.50 

Assignment  22,  Page  12 


January  16 

Voucher  No.  53,  issued  to  New  York  Central  Railroad  Company,  for 
$87.20,  for  freight  on  raw  materials  received  from  Adams  &  Ellinger. 
(Entry  in  voucher  register  and  check  register.) 

January  18 

Voucher  No.  54  was  issued  in  favor  of  Adams  &  Ellinger  for  invoices 
of  January  12,  15,  and  17,  aggregating  $392.60.  This  voucher  was  approved 
for  payment.     (Entry  in  voucher  register  and  check  register.) 

You  should  refer  to  the  voucher  and  voucher  check  forms  illustrated  in 
this  assignment  and  note  that  these  transactions  are  recorded  as  they 
would  appear  on  the  voucher. 

January  19 
Office  pay  roll  for  first  half  of  the  month,  as  follows: 

Salesmen's  Salaries $1,800.00 

Office  Salaries 750.00 


$2,550.00 


The  pay  roll  distribution  was  attached  to  voucher  No.  55  and  check 
was  cashed  at  the  bank,  the  money  being  used  to  pay  employes.  (Entry 
in  voucher  register  and  check  register.) 

January  19 

The  petty  cashier  having  nearly  exhausted  his  Imprest  Fund,  presented 
a  statement  to  the  general  cashier  showing  the  following  disbursements: 

Factory  Supplies $  37.85 

Heat,  Light,  and  Power 16.45 

Miscellaneous  Factory  Expense 8.20 

Traveling  Expense 12.00 

Cartage  on  Sales 3.50 

Advertising 5.80 

Telegrams 4.40 

Stationery  and  Printing 17.60 

Miscellaneous  Office  Expenses 3.20 

$109.00 


Voucher  No.  56  was  issued  in  favor  of  the  Imprest  Fund  and  was 
cashed,  so  that  the  fund  was  brought  back  to  its  original  amount,  $150.00. 
(Entry  in  voucher  register  and  check  register.) 

January  20 

In  order  to  put  the  factory  in  better  working  condition,  certain  addi- 
tions and  improvements  were  made  to  the  building  by  a  contractor,  Joseph 
Duncan.  He  completed  the  M^ork  and  presented  his  bill,  amounting  to 
$1,500.00.    He  offered  a  discount  of  2  per  cent  if  paid  before  the  first  of 

Assignment  22,  Page  13 


the  month.  The  company  took  advantage  of  this  discount  and  issued 
voucher  No.  57  for  $1,470.00.  (Entry  in  voucher  register  and  check  regis- 
ter.) 

This  transaction  illustrates  a  principle  that  you  should  always  bear  in 
mind,  namely,  a  cash  discount  on  a  capital  expenditure  is  never  credited 
to  Cash  Discount  on  Purchases.  Such  discount  is  not  an  earning  from 
operations;  therefore,  it  is  not  credited  to  financial  income.  It  should 
be  deducted  from  the  invoice  and  considered  as  a  reduction  in  the  cost 
of  the  asset,  just  as  the  amount  of  a  trade  discount  is  deducted  from  an 
invoice. 

January  28 

The  factory  pay  roll  for  the  week  was  as  follows: 

Direct  Labor  $3,673.35 

Indirect,  Labor 918.15 


$4,591.50 


Voucher  78  was  issued  to  cover  this  pay  roll,  and  recorded  in  the 
voucher  register.  This  voucher  v/as  paid  with  check  No.  24.  (Entry  in 
voucher  register  and  check  register.) 

January  31 

The  accrued  factory  labor  for  January  30  and  31  amounted  to  $512.00, 
distributed  as  follows: 

Direct  Labor  $415.25 

Indirect  Labor  96.75 

$512.00 

Voucher  79  was  issued  to  cover  this  accrued  labor  charge,  and 
recorded  in  the  voucher  register.  The  payment  for  this  voucher  was  not 
made  until  February  4,  the  end  of  the  next  week. 

When  the  pay  roll  was  prepared  on  February  4,  for  the  week,  the 
distribution  was  made  as  follows: 

Direct  Labor,  February  1  to  February  4   $3,681.10 

Indirect  Labor,   February  1   to  February  4       1,118.25 

Vouchers  Payable   (accrued  for  January  31) 512.00 

$5,311.35 


A  voucher  would  be  issued  on  February  4  for  $5,311,35  and  entered  in 
voucher  register  as  a  credit  to  Vouchers  Payable.  As  the  February 
transactions  are  not  shown  in  the  voucher  register,  the  entry  is  merely 
explained.  The  amount  of  accrued  labor  January  31  would  be  entered  in 
the  general  ledger  column  and  posted  separately  to  the  debit  of  Vouchers 
Payable.  This  debit  posting  would  then  offset  the  credit  to  Vouchers 
Payable  for  $512.00,  made  for  accrued  wages  on  January  31,  in  the 
voucher  register  for  January.  Voucher  80  was  issued  on  January  31  for 
office  pay  roll,  amounting  to  $2,550.  (Entry  in  voucher  register  and  in 
check  register.) 

Assignment  22,  Page  14 


Posting  from  Voucher  Register.  The  postings  to  be  made  from  the 
voucher  register  on  January  31  are  easy  to  understand.  The  footings 
indicated  in  the  voucher  register  represent  the  totals  for  the  month  of 
January.    They  are  summarized  as  follows: 

Raw  Materials $12,760.50 

Freight  and  Cartage  in  1,185.15 

Direct  Labor  15,870.50 

Indirect  Labor  5,310.10 

Factory  Supplies  810.00 

Repairs  to  Machinery  and  Eq.uipment 415.00 

Heat,  Light,  and  Power  2,182.50 

Miscellaneous  Factory  Expenses  22.25 

Selling  Expenses  3,600.00 

Traveling  Expense 228.30 

Advertising 55.75 

Freight  and  Cartage  Account 113.86 

Miscellaneous  Selling  Expenses  334.50 

Office  Salaries 1,500.00 

Office  Supplies 88.75 

Telephone  and  Telegraph 11.20 

Stationery  and  Printing 34.10 

Miscellaneous  Expenses  28.85 

General  Ledger  Accounts 5,321.35 

Vouchers  Payable  $49,872.66 

From  the  voucher  register,  all  the  above  amounts  are  posted  to  the 
debit  side  of  the  accounts,  except  the  total  in  the  general  ledger  column. 
In  this  column,  each  item  has  already  been  posted  individually  as  a  debit 
to  the  account  indicated  in  the  account  column,  provided  postings  were 
made  currently.  The  page  number  of  the  general  ledger  on  which  the 
account  appears  is  recorded  in  the  folio  column. 

The  sum  of  the  debits  agrees  with  the  total  of  the  vouchers  payable 
column  which  is  posted  to  the  credit  of  the  Vouchers  Payable  Account 
in  the  general  ledger. 

Postings  from  the  Check  Register  Book.  After  posting  the  voucher 
register,  the  next  step  is  to  post  the  totals  of  the  check  register.  The 
total  amount,  $43,810.12,  of  the  vouchers  payable  column  is  posted  to  the 
debit  of  Vouchers  Payable  Account ;  the  cash  discount  column,  amounting 
to  $382.05,  is  posted  to  the  credit  of  Cash  Discount  on  Purchases  Account. 
The  cash  withdrawal  column  is  posted  to  the  credit  of  Cash  in  Bank 
Account. 

After  the  postings  have  been  made  to  the  Vouchers  Payable  Account, 
it  v.^ill  appear  on  the  general  ledger  as  follows: 

VOUCHERS  PAYABLE 


Date 

Items 

Fol. 

V 

Debits 

Date 

IterQS 

Fol. 

v/ 

Credits 

1922 
Jan. 

31 
31 

Vouchers  Paid 
Balance 

C.R. 

1 

43,810 
6,062 

12 
54 

66 

1922 
Jan. 

Feb. 

31 
1 

Total  Vouchers 
issued 

Balance 

V.R. 

1 

49,872 

66 

49,872 

49,872 

66 

6,062 

54 

Assignment  22,  Page  15 


Listing  the  Unpaid  Vouchers — Use  of  Unpaid  File.  You  will  see  from 
the  above  account  that  there  is  a  credit  balance  of  $6,062.54  on  January 
31.  If  all  the  vouchers  for  the  month  were  shown  in  the  voucher  register 
form  in  Figure  4,  it  would  be  necessary  to  list  only  the  unpaid  vouchers 
and  total  the  amounts  to  reconcile  with  the  credit  balance  of  Vouchers 
Payable. 

The  unpaid  vouchers  of  the  Smith  Motor  Company  were  listed  as  fol- 
lows: 


Voucher 
No. 

47 
51 
60 
66 
79 


Name 

H.  D.  Bartlett  &  Co. 
Corry  Coal  Co.  .  .  . 
Adams  &  El  linger  .  . 
Advertising  Sign  Co. 
Accrued  Pay  Roll  .  . 


Amount 


$1,185.25 


950.00 

368.50 

46.79 

512.00 


S6,062.54 


We  have  previouslj^  mentioned  the  fact  that  vouchers  are  kept  in  an 
unpaid  file  until  paid.  Then  when  they  are  paid,  they  are  filed  numer- 
ically by  voucher  number  in  a  paid  file.  The  unpaid  vouchers  were 
obtained  from  file,  and  the  correctness  of  the  above  list  was  verified. 
This  list  is  somewhat  like  a  summary  of  a  subsidiary  creditors'  ledger, 
which  reconciles  with  its  controlling  account.  Accounts  Payable.  With 
the  voucher  system,  however,  individual  accounts  are  not  kept  Vv'ith  cred- 
itors. The  voucher  register,  together  with  the  voucher  file,  takes  the 
place  of  such  a  subsidiary  ledger. 

Index  of  Creditors'  Vouchers.  Sometimes  objection  is  raised  to  the 
voucher  system  because  it  does  not  give  a  record  of  the  volume  of  busi- 
ness done  with  each  creditor.  It  is,  as  you  know,  often  desirable  to  make 
reference  to  past  transactions  with  creditors.  This  would  be  very  diffi- 
cult if  the  vouchers  were  not  numbered. 

The  Smith  Motor  Company  therefore  kept  an  alphabetical  index  of 
creditors'  vouchers,  on  which  were  shown  the  voucher  number  and  the 
amount  of  each  voucher.  This  is  a  card  index,  each  creditor  being  pro- 
vided with  a  card  on  which  are  listed  the  vouchers  recording  the  business 
done  with  him.  These  cards  are  then  put  in  a  drawer  and  filed  in  alpha- 
betical order  by  firm  name. 

Another  method  of  providing  an  index  to  creditors  is  to  make  a  car- 
bon copy  of  the  office  voucher.  The  reverse  side  of  this  copy  would  not 
have  the  distribution  as  does  the  office  voucher.  The  carbons  are  filed 
in  a  drawer  alphabetically  by  firm  name.  Reference  to  this  file  will  show 
the  voucher  numbers  which  have  been  issued.  The  vouchers  may  then 
be  obtained  from  the  voucher  file  for  detail  information. 


Assignment  22,  Page  16 


Vouchers  Without  Attached  Checks.  Still  another  method  leads  to 
the  introduction  of  a  set  of  voucher  forms,  which  are  illustrated  in 
Figure  6. 

In  this  case,  the  check  is  not  made  up  at  the  same  time  that  the 
voucher  is.  The  voucher  and  check  are  kept  separate.  The  invoices  and 
papers  are  attached  to  the  back  of  the  voucher  and  distribution  is  made 
on  the  face.  After  the  voucher  is  entered  in  the  voucher  register,  it  is 
placed  in  an  unpaid  voucher  file  or  it  is  passed  to  the  proper  disbursing 
officer  for  immediate  payment. 

Quite  frequently  a  voucher  is  not  approved  for  payment  immediately. 
Therefore,  the  check  number,  which  is  also  consecutively  used,  is  not  the 
same  as  the  voucher  number.  When  the  voucher  is  approved  for  pay- 
ment, a  voucher  check  is  issued.     This  check  number  has  a  statement 


VOUCHER 

Vouche 

r  Kn. 

Tn  favor  of 

Da 

fp                                1Q 

AHflress 

1 

DEBITS                                                                     1 

Account 

Acct. 
No. 

Amount. 

Account 

Acct. 

x\0. 

Amount 

PniHhynhpflf  No.                                   Date.                              .        Vnuchprs  Pnyahip  Cr     .f 

Pripps!  O  TC  'f\  hy                                                                              nistrihiitinn  hv 

Extensions  Checked  by                          .  .               Distribution  approved 
Examined  and  entered  i"  Vn  Rpor  hv                      Annrnvprl  for  PavTTipnt 

hy 

Auditor 
hv 

Trpasurer 

Voucher  with  Distribution  on  F.\ce 

Figure  6. — Here  is  another  voucher,  somewhat  different  in  form  (size  8^/2x6).  Instead 
of  folding  aiifl  placing  distribution  on  reverse  side,  the  voucher  clerk  will  attach  all 
invoices  and  papers  to  back  of  this  voucher  and  make  all  distribution  on  face.  When 
payment  has  been  made,  the  voucher  is  filed  in  a  drawer  in  numerical  oi'der  by  voucher 

number. 


Assignment   22,  Page   17 


attached  to  the  left  hand  of  the  check,  which  is  filled  out  so  as  to  enable 
the  payee  to  properly  apply  the  remittance.  A  convenient  arrangement 
is  to  have  these  checks,  which  are  the  width  of  the  ordinary  correspond- 
ence paper,  set  up  on  a  sheet  of  paper  in  blocks  of  three  with  perforations 
between  them.  By  the  use  of  carbon  paper,  duplicate  copies  of  the  checks 
can  be  made.  The  block  of  checks  is  shpped  into  a  typewriter  and  the  infor- 
mation to  be  filled  out  is  taken  from  the  voucher  itself.  Thus  the  typist 
can  make  up  three  different  checks  from  vouchers  before  taking  the  sheet 
from  the  typewriter.  Otherwise,  if  the  checks  are  not  arranged  in  this 
manner,  the  typist  must  put  in  and  take  out  the  papers  three  times.  The 
checks  can  also  be  made  in  duplicate.  The  check  number  and  the  date  of 
payment  are  recorded  on  the  voucher. 

The  vouchers  are  put  in  a  paid  file  in  numerical  order  by  voucher 
number  and  the  duplicate  checks  are  filed  alphabetically  in  a  drawer. 
With  this  method  there  is  a  complete  cross  reference  between  the  voucher 
file  and  the  check  file.  For  example,  the  accountant  may  wish  to  find  out 
what  has  been  paid  to  Adams  &  Ellinger.  He  will  go  to  the  duplicate 
check  file  and  note  the  checks  that  have  been  issued.  Each  check  shows 
the  number  of  the  voucher  for  which  payment  is  made.  He  can  then  go 
to  the  voucher  file  and  get  the  complete  details  from  the  voucher. 

How  Purchase  Returns  and  Allowances  Are  Handled  in  a  Voucher 
System.  If  adjustments  for  returns  and  allowances  could  be  made  before 
the  voucher  for  the  transaction  is  prepared,  then  the  net  amount  to  be 
paid  would  be  the  amount  of  the  voucher.  This,  however,  is  not  possible 
in  most  cases.  Usually  adjustments  must  be  made  after  the  voucher  has 
been  made  out. 

For  example,  two  or  three  weeks  after  the  voucher  is  made,  an  over- 
payment may  have  to  be  refunded  or  some  material  may  have  to  be 
returned.  The  deduction  must  then  be  made  thru  another  voucher.  For 
this  deduction,  Raw  Materials,  or  any  other  account  that  was  previously 
charged,  would  be  credited  and  Vouchers  Payable  debited.  To  accomplish 
this,  the  distribution  is  entered  on  the  voucher  in  red  ink  figures  and 
recorded  also  in  the  voucher  register  in  red  figures,  both  in  the  vouchers 
payable  column  and  in  the  distribution  column  affected  by  the  allowance. 
In  adding  up  the  columns  of  the  voucher  register,  the  sum  of  the  red  ink 
figures  is  deducted  from  the  total  black  ink  figures  to  determine  the  net 
total. 

Partial  Payments  of  Vouchers.  The  voucher  system  usually  implies 
the  payment  of  each  voucher  in  full.  If,  however,  the  concern  is  not  in 
a  position  to  pay  some  voucher  in  full,  and  wishes  to  make  a  partial  pay- 
ment on  it,  it  will  be  necessary,  in  case  the  voucher  check  is  issued  at  the 
same  time  as  the  voucher,  to  cancel  the  original  voucher  and  to  make  two 
new  ones,  one  for  the  amount  to  be  paid  and  another  for  the  unpaid  por- 
tion. The  amount  of  the  two  new  vouchers  should  be  recorded  on  the 
voucher  register  in  the  general  ledger  column  and  posted  to  the  debit  of 
Vouchers  Payable. 

If  the  business  is  in  the  habit  of  making  many  partial  payments,  the 
complete  use  of  the  voucher  system  may  have  to  be  abandoned.     This 

Assignment  22,  Page  18 


objection  is  overcome  in  part  at  least  if  the  voucher  check,  like  the  one 
illustrated  in  Figure  7,  is  used,  because  voucher  checks  can  be  issued  inde- 
pendently of  the  voucher.  In  this  case,  the  date,  check  number,  and  the 
amount  of  partial  payments  are  recorded  on  the  back  of  the  voucher. 


This  check  in  full  payment 

of  the  items  listed  below. 

If  not  correct,  return 

MERCANTILE  HARDWARE  CO.                 ^°- 

Date                    IP 

Our  Voucher  No. 

Your  invoices 

Pay: 

Dollars 

Date 

Invoice 
_   No.  _ 

Discount 

Net 
Amount 

to  the  order  of 

/'                             N 

( 

V                     y 

DEARBORN  NATIONAL  BANK 
Chicago,  111. 

MERCANTILE  HARDWARE  CO. 

Total 

Less  Deductions 
Amount  of  Check 

Treasurer 
Countersigned  by , 

Auditor 

Voucher  Check  Sep.arate  from  Voucher 

Figure  7. — This  voucher  check  is  issued  in  payment  of  the  above  voucher.  All  the  infor- 
mation to  be  filled  in  is  obtained  by  a  typist  from  the  voucher.  Wlien  properly  sig'ned, 
this  check  is  folded  on  the  line  between  statement  and  body  of  check  so  that  statement 
is  folded  over  back  of  check.  The  check  is  then  placed  in  a  regular  sized,  visible  envelope, 
thus  saving  time  in  addressing  envelopes.    The  size  of  this  voucher  check  is  3^^  x8V^ 

inches. 

The  Journal  Voucher.  When  special  journals  are  used,  such  as  the 
voucher  register,  check  register,  sales  book,  and  note  registers,  most 
transactions  will  be  recorded  in  these  books.  There  are  certain  entries, 
however,  which  cannot  be  entered  in  these  books,  because  of  their  un- 
usual nature.  These  transactions  are  therefore  recorded  in  the  general 
journal. 

For  example,  the  opening  and  closing  entries,  periodic  adjustments  for 
accrued  and  deferred  items,  and  adjustments  for  depreciation  and  loss  on 
uncollectible  accounts,  and  any  other  unusual  transactions  are  the  sort  of 
entries  that  must  be  made  thru  the  journal. 

In  the  case  of  such  transactions,  it  is  important  that  all  the  details 
that  are  necessary  to  explain  or  verify  the  entries  be  readily  available. 
It  frequently  happens  that  the  correctness  of  a  journal  entry  is  questioned 
by  the  auditor.  If  all  the  evidence  can  be  quickly  drawn  from  the  voucher 
file,  supporting  or  authorizing  the  entry,  not  only  is  much  time  saved,  but 


Assignment  22,  Page  19 


the  bookkeeper  is  relieved  of  any  personal  responsibility  that  might  be 
charged  to  him  for  an  entry  that  is  not  in  accord  with  good  accounting 
principles.  It  is  desirable,  therefore,  to  have  every  journal  entry  sup- 
ported by  a  journal  voucher. 

The  forms  of  the  journal  voucher  are  usually  very  simple,  as  illus- 
trated in  Figure  8. 


JOURNAL  VOUCHER 

W.          120 

nato  Sept 

ember  30    ,q 

22 

ACCOUNTS 

DR. 

CR. 

Surplus 

S6,000 

00 

Dividends  Payable 

$6,000 

00 

•p     1       .•                 The  board  of  directors  declare  a  6  per  cent  cash  dividend  on  $100,000 

worth  of  preferred- stock.     The  dividends  are  payable  not  later  than  October  15,   1922 

M«Hphv                      P     Calhoun                               ,„,,,_ 

i.orlhv                       S      Smith 

ChP^V^H  hv                 Paul  Jones                              p„,,,,. 

, Journal  Pag 

27 

The  Journal  Vouchek 

Figure  8. — In  this  journal  voucher   the  explanation  is  given  in  full  on  the  face  of  the 
voucner.    In  some  journal  vouchers  the  explanation  is  recorded  on  the  reverse  side.     In 
any  case,  the  voucher  gives  the  bookkeeper  authority  to  bring  the  declaration  of  divi- 
dends into  the  records. 

Journal  vouchers  are  numbered  consecutively.  They  form  the  basis 
for  entries  in  the  general  journal  in  the  same  consecutive  order.  When 
the  voucher  is  prepared,  dated,  signed,  and  properly  approved,  it  is  re- 
corded by  the  bookkeeper  in  the  general  journal,  just  like  ordinary  vouch- 
ers are  recorded  in  the  voucher  register.  In  recording,  no  particulars  are 
given  except  the  journal  voucher  number,  date,  accounts  to  be  debited  and 
credited,  and  the  amounts.  The  journal  voucher  with  all  supporting 
papers  attached  is  then  filed  in  a  drawer,  separate  from  other  vouchers, 
in  numerical  order  by  journal  voucher  number  for  future  reference. 


Assignment  22,  Page  20 


In  some  businesses  journal  vouchers  are  made  in  duplicate.  The 
original  is  then  filed  in  a  loose-leaf  binder,  which  virtually  takes  the  place 
of  the  general  journal.  The  duplicate  is  filed  away  with  all  necessary 
papers  and  correspondence  attached.  In  this  way  time  is  saved,  since  it 
is  not  necessary  to  copy  the  debits  and  credits  in  a  bound  journal. 

Advantages  of  the  Voucher  System.  You  have  now  become  familiar 
with  the  operations  of  the  voucher  system.  Let  us,  in  conclusion,  review 
briefly  some  of  its  advantages. 

1.  It  results  in  a  great  saving  of  labor,  since  there  is  no  posting  to 
individual  accounts  of  creditors. 

2.  It  requires  that  a  formal  voucher,  properly  approved,  be  issued, 
thus  preventing  the  unauthorized  payment  of  money. 

3.  It  results  in  a  uniformity  in  the  method  of  treating  all  payable 
items. 

4.  All  payable  items  are  distributed  in  one  book  of  original  entry. 


MAIN  POINTS  IN  THIS  ASSIGNMENT 

Thruout  this  assignment  the  following  principles  have  been  illustrated 
and  explained.  They  are  of  prime  importance  if  you  wish  to  understand 
the  purpose  and  operation  of  the  voucher  system. 

First:  The  voucher  system  meets  the  needs  of  certain  businesses, 
especially  large  manufacturing  concerns.  The  advantages 
have  been  summarized  above. 

Second:     The  voucher  system  uses  the  following  forms  and  records: 

1.  The  voucher  check. 

2.  The  office  voucher. 

3.  The  voucher  register. 

4.  The  check  register. 

Be  sure  that  you  understand  the  forms  as  illustrated  in 
the  assignment.  If  necessary,  refer  to  them  several  times 
so  that  you  will  become  familiar  with  their  use. 

Third :  In  starting  a  voucher  system,  each  creditor's  account  on  the 
general  ledger  must  be  closed.  A  voucher  is  made  out  for 
each  creditor,  and  from  these  vouchers  entries  are  made  in 
the  voucher  register.  The  vouchers  are  filed  in  an  unpaid 
voucher  file. 

Fourth :  Payment  of  vouchers,  after  the  vouchers  are  properly  author- 
ized, is  made  thru  the  check  register. 


Assignment  22,  Page  21 


Fifth:  At  the  end  of  the  period  the  voucher  register  is  posted  by- 
totals,  except  the  general  ledger  column.  Items  in  this 
column  are  posted  separately  and  currently. 

Sixth :  The  check  register  is  also  posted  at  the  end  of  the  period,  as 
illustrated  in  the  assigmnent. 

Seventh:  Purchase  returns  and  allowances  are  handled  thru  new 
vouchers. 

Eighth:  Journal  vouchers  are  used  as  a  basis  for  general  journal 
entries  covering  non-cash  transactions. 

If  you  feel  that  you  do  not  understand  any  of  these  points,  you  will  save 
time  by  rereading,  now,  certain  parts  of  the  assignment.  In  this  way  you 
will  find  less  difficulty  in  solving  the  following  problems. 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  22 

You  are  to  record  on  a  voucher  register  and  check  register  the  follow- 
ing transactions  of  the  BROWN  SULKY  PLOW  COMPANY  for  the  month 
of  June,  1922. 

The  Brown  Sulky  Plow  Company  is  engaged  in  the  manufacture  of 
Sulky  plows.  The  voucher  system  has  been  used  satisfactorily  for  a  long 
time.  The  voucher  and  voucher  check  forms  used  are  those  illustrated 
in  the  latter  part  of  this  lesson.  The  voucher  check  has  attached  on  the 
left  end  a  statement  describing  the  invoices  or  other  items  for  which  pay- 
ment is  made.  The  system  of  numbering  vouchers  provided  that  the 
number  of  the  month  should  be  prefixed  to  the  consecutive  numbers. 
Therefore,  the  vouchers  for  the  month  of  May  were  numbered  consecu- 
tively from  501.  The  voucher  numbers  for  the  month  of  June  should  also 
be  numbered  consecutively  from  601  to  699,  or  the  last  number  used  if 
less  than  100  vouchers  are  issued.  For  the  month  of  June  the  voucher 
checks  start  with  number  325. 


June  1 

There  was  a  credit  balance  on  May  31  of  $8,743.20  in  Vouchers  Payable 
Account.     The  list  of  vouchers  in  the  unpaid  file  was  as  follows : 


Voucher 
No. 
536 
548 
549 
551 
552 


Name 

Stahl  Steel  Company  .  .  . 
Best  Drop  Forge  Works  .  . 
National  Fire  Insurance  Co. 
U.  S.  Advertising  Company 
Accrued  Wages  

Total  


Amount 

S2,099.50 

2,701.25 

70.00 

1,185.00 

2,687.45 

$8,743.20 


Assignment  22,  Page  22 


Voucher  No.  601,  issued  to  pay  the  New  York  Central  Railroad  Com- 
pany $207.50,  freight  on  raw  materials  received  from  the  Adams  Machine 
Company.     Check  No.  325  was  issued  in  payment. 

Voucher  No.  536  was  taken  out  of  the  unpaid  file  and  approved  for 
payment  in  order  to  take  advantage  of  a  discount  of  2  per  cent. 

June  3 

Received  bill  from  the  Chicago  Printing  Company  for  $442.50,  for 
which  $312.00  was  for  circulars  advertising  plows  and  $130.50  for  sta- 
tionery and  printing.     A  voucher  was  issued  and  approved  for  payment. 

You  may  fill  out  the  blank  voucher  in  your  lesson,  using  the  above 
transactions.  Also  write  the  voucher  check  for  $442.50.  You  need  not 
send  these  forms  to  the  University.  This  suggestion  is  given  that  you 
may  familiarize  yourself  with  the  use  of  the  voucher  forms. 

June  5 

Goods,  together  with  the  invoice,  amounting  to  $1,685.50  were  re- 
ceived from  Best  Drop  Forge  Works.  Invoice  was  approved,  and  voucher 
No.  603  was  issued,  recorded,  and  placed  in  the  unpaid  file. 

Received  invoice  from  xA.dams  Machinery  Company  dated  June  1,  for 
raw  materials  received,  amount  $2,995.00,  terms  2%/10  days.  Voucher 
No.  604  was  issued  to  cover  this  invoice. 

June  6 

A  voucher  was  issued  for  pay  roll  distribution  of  factory  pay  roll,  week 
ending  June  3,  as  follows : 

Direct  Labor  $2,871.46 

Indirect  Labor  882.75 

Repairs  to  Plant  and  Equipment  213.10 

Heat,  Light,  and  Power  (Engineers  and  Firemen)  108.00 

$4,075.31 


A  voucher  check  was  issued  for  $4,075.31  plus  accrued  wages,  covered 
by  voucher  552,  to  the  order  of  pay  roll  and  cashed  at  the  bank.  The 
money  was  brought  back  to  the  office  and  put  up  into  envelopes  to  be  given 
out  to  the  workmen. 

June  8 

Voucher  numbers  548  and  603  were  taken  out  of  the  unpaid  file  and  a 
voucher  check  was  issued  to  cover  both  vouchers,  less  2  per  cent  discount. 

June  10 

A  note  of  $1,000  with  6  per  cent  interest  for  six  months  was  due.  A 
voucher  and  check  were  issued  in  favor  of  Stahl  Steel  Company  for  the 
total  amount.  (Charge  interest  to  Accrued  Interest.) 

Assignment  22,  Page  23 


June  12 

Out  of  a  petty  cash  fund  of  $100  the  following  disbursements  were 
made: 

Stationery  and  Printing  $16.45 

Shop  Supplies 48.90 

Office  Supplies  24.25 

$89.60 


From  the  statement  prepared,  a  voucher  was  issued  and  a  check  was 
made  out  in  favor  of  the  cashier.  The  cashier  cashed  the  check  and  his 
petty  cash  fund  was  thereby  replenished.  Voucher  covering  invoice  from 
Adams  Machinery  Company  approved  for  payment  and  discount  taken. 

June  13 

Freight  amounting  to  $48.75  was  paid  to  Chicago  &  Northwestern 
Railway  Company  on  a  shipment  of  goods  sent  to  a  customer,  the  terms 
being  F.O.B.  destination. 

Factory  pay  roll  for  the  week  ending  June  10  was  as  follows : 

Direct  Labor  $3,281.10 

Indirect  Labor  1,098.25 

Heat,  Light,  and  Power 118.00 

Repairs  to  Plant  and  E(iuipment 18.00 


$4,515.35 


A  voucher  was  issued  and  the  workmen  were  paid. 


June  15 


Goods  and  invoice  received  from  the  Stahl  Steel  Company,  amount 
$2,613.25,  terms  2  per  cent  10  days,  net  30.  Voucher  was  issued  and 
held  for  payment  in  unpaid  file. 

Office  pay  roll  for  the  first  half  of  the  month  was  as  follows : 

Factory  Administration  $  400.00 

Salesmen's  Salaries  2,785.00 

Office  Salaries  1,830.00 

$5,015.00 


A  voucher  was  issued  and  voucher  check  prepared  for  the  total  amount 
of  pay  roll.  This  voucher  check  was  cashed  and  money  used  to  pay  office 
employes. 

June  19 

Received  invoice  from  Hubbard  &  Company  for  a  boring  machine  to 
be  used  in  the  factory,  amount  $625.00,  10  per  cent  off  for  cash.  A 
voucher  and  a  voucher  check  were  issued  at  once. 

Assignment  22,  Page  24 


June  20 

Received  from  the  Inland  Foundry  Company  goods  and  invoices 
amounting  to  $2,303.00.  Invoice  not  vouchered  until  another  shipment 
was  received  on  June  24. 

Factory  pay  roll  for  week  ending  June  17  was  as  follows: 

Direct  Labor  $3,425.50 

Indirect  Labor  1,126.10 

Heat,  Light,  and  Power  123.50 

$4,675.10 

A  voucher  was  issued  and  the  money  used  to  pay  workmen. 

June  23 

The  cashier  presented  a  statement  of  petty  cash  disbursements  as 
follows : 

Traveling  Expense  $12.80 

Office  Supplies  21.10 

Stationery  and  Printing  13.20 

Miscellaneous  General  Expenses   8.85 

$55.95 

A  voucher  was  prepared  and  the  cashier  reimbursed. 

June  24 

Another  shipment  from  the  Inland  Foundry  Company  received  with 
invoice  amounting  to  $1,200.00,  terms  net  30  days.  The  previous  invoice 
together  with  this  one  was  vouchered  and  the  voucher  recorded  in  the 
voucher  register. 

Freight  was  also  paid  to  the  Pennsylvania  Railroad  Company,  amount- 
ing to  $28.10  on  the  above  shipment. 

June  27 

Bill  received  from  the  U.  S.  Advertising  Company  for  advertising 
services  rendered.  Voucher  issued  and  put  in  unpaid  file.  Amount 
$300.00. 

Factory  pay  roll  for  week  ending  June  24  was  as  follows: 

Direct  Labor  $3,312.20 

Indirect  Labor  995.50 

Heat,  Light,  and  Power  105.00 

Repairs  to  Plant  and  Equipment  55.30 

$4,468.00 

A  voucher  was  issued  and  the  workmen  were  paid. 

Assignment  22,  Page  25 


June  30 

Shop  supplies  purchased  from  Joseph  Cooper  &  Company  amounted 
to  $381.25. 

A  voucher  was  issued  and  placed  in  the  unpaid  file. 

The  office  pay  roll  for  the  last  half  of  the  month  was  as  follows: 

Factory  Administration  S  450.00 

Salesmen's  Salaries  2,785.00 

Office  Salaries  1,810.00 


$5,045.00 


A  voucher  was  prepared  and  employes  were  paid. 


The  cashier  presented  the  following  statement  of  disbursements  from 
petty  cash  to  be  vouchered  and  paid: 

Shop  Supplies $  2.80 

Heat,  Light,  and  Power 5.75 

Traveling  Expense  57.50 

Advertising 13.00 

Miscellaneous  Selling  Expenses   15.25 

$94.30 


The  factory  pay  roll  from  June  26  to  June  30,  5  days,  has  accrued  and 
will  not  be  paid  until  July  3.     The  distribution  was  as  follows : 

Direct  Labor  $1,812.50 

Indirect  Labor  689.00 

Heat,  Light,  and  Power 63.25 

$2,564.75 

1.  You  are  to  record  the  above  transactions  on  the  voucher  register 
and  check  register  forms  provided  with  this  assignment. 

2.  After  entries  have  been  made,  foot  voucher  register  and  check  reg- 
ister, post  vouchers  payable  to  the  Vouchers  Payable  Account,  list  the 
unpaid  vouchers,  and  reconcile  with  the  Vouchers  Payable  Account. 

Submit  all  your  work  for  review  and  grading. 


Assignment  22,  Page  26 


Higher  Accountancy 

□  I  -ID 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assig,nnient  23 

FACTORY  ACCOUNTING 


T 


'HERE  are  hundreds  of  thousands  of  men  who  are 
termed  * 'bright"  and  clever — men  who  are  good 
workers,  but  who  never  seem  to  progress.  They  have 
failed  to  recognize  the  fact  that  permanent  success  lies  in 
specialization — in  selecting  one  branch  of  business,  learn- 
ing it  thoroly,  and  sticking  to  it. 

IRVING  R.  ALLEN, 

Vice  President  and  General  Manager, 
H.  W.  Kastor  &  Sons  Advertising  Co. 


LaSalle  Extension  University 

Chicago 


NHA-23 
1-33 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 

printed  in  the  u.  s.  a. 


FACTORY  ACCOUNTING 

MANUFACTURING  STATEMENT— COST  OF  PRODUCTION 

Most  businesses  that  operate  for  profit  are  engaged  in  buying  and  selling 
some  product,  either  as  traders  or  as  manufacturers.  Trading  concerns, 
such  as  we  have  been  considering  in  preceding  assignments,  buy  and  sell 
merchandise ;  that  is,  they  buy  it,  and  sell  it  again  in  the  same  form. 

Manufacturing  businesses  also  buy  and  sell  for  profit,  but  the  goods  they 
sell  are  not  in  the  same  form  as  those  they  buy.  The  manufacturer  buys 
material,  and  then  by  adding  labor  and  using  machinery  he  changes  this 
material  into  a  different  form,  which  he  sells  to  the  wholesaler  or  directly 
to  the  retailer.  It  is  this  additional  process  of  converting  material  that 
distinguishes  the  manufacturing  from  the  trading  business. 

For  example,  a  retail  dealer  in  men's  clothing  buys  and  sells  the  same 
garments.  The  manufacturer  of  the  garments,  however,  buys  cloth  and 
then  employs  labor  and  uses  machines  in  converting  this  cloth  into  the 
finished  garments.  Likewise  the  manufacturer  of  the  cloth  buys  the  cotton 
and  wool  and  converts  this  into  the  finished  product,  cloth.  Thus  you  see 
that  what  is  a  finished  product  to  the  cloth  manufacturer  is  raw  material 
to  the  garment  manufacturer. 

During  the  last  twenty  years  manufacturing  has  developed  tre- 
mendously fast.  From  1914  to  1919  the  number  of  plants  increased  5.2  per 
cent  over  the  preceding  five  years.  According  to  the  last  United  States 
census  there  are  now  290,105  manufacturing  plants  in  operation  in  the 
United  States,  with  a  production  valued  at  over  $62,000,000,000.00.  In  the 
state  of  New  York  alone  there  are  49,330  plants  with  a  production  valued 
at  $8,800,000,000.00. 

This  increase  in  manufacturing  has  naturally  called  for  additional 
accounting  control.  As  a  result,  cost  accounting  has  developed  into  an  exact 
science,  with  the  ultimate  purpose  of  helping  the  manufacturer  solve  his 
problems  of  production.  The  subject  of  cost  accounting  will,  however,  be 
taken  up  in  a  later  section  of  the  course.  In  this  Assignment  we  will 
present,  by  way  of  introduction  to  the  subject,  some  of  the  simpler  prob- 
lems connected  with  manufacturing  accounts,  such  as  the  various  costs  of 
production  and  the  manufacturing  statement. 

How  Manufacturing  Accounts  Differ  from  Trading  Accounts.     The 

general  accounting  methods  of  a  manufacturing  concern  are  to  a  large 
extent  the  same  as  those  employed  by  a  trading  business.  In  the  manu- 
facturing enterprise,  however,  we  have  the  special  problem  of  determining 
the  cost  of  the  goods  manufactured,  which  later  are  sold  at  a  profit.  It 
might  be  well  to  emphasize  at  this  point  that  there  can  be  no  profit  realized 
until  the  goods  are  actually  sold  and  converted  into  cash  or  collectible  claims 
against  customers. 


In  a  trading  business  it  is  only  necessary  to  ascertain  the  cost  of  the 
goods  bought  and  sold  and  to  arrive  at  the  amount  realized  on  those  sold 
to  find  the  gross  profit.  By  charging  against  the  gross  profit  the  general 
expenses  of  the  business,  the  net  profit  is  ascertained.  The  operations  of 
a  trading  concern  are,  therefore,  summarized  in  two  accounts: 

1.  The  Trading  Account. 

2.  The  Profit  and  Loss  Account. 

In  a  manufacturing  enterprise,  it  is  necessary,  in  addition,  to  determine 
the  cost  of  production,  and  this  is  done  by  using  an  additional  account, 
called  the  Manufacturing  Account.  The  manufacturer  therefore  divides  his 
operating  accounts  on  the  general  ledger  into  three  heads : 

1.  The  Manufacturing  Account — pertaining  to  the  manufacture  of  goods. 

2.  The  Trading  Account — pertaining  to  their  sale. 

3.  The  Profit  and  Loss  Account — summarizing  all  the  expenses  incurred  in 
producing  and  marketing  the  goods,  including  the  general  expenses  of  the 
business. 

Elements  of  Cost  of  Production.  Since  the  Manufacturing  Account  is 
intended  to  give  the  cost  of  production,  it  first  of  all  will  be  well  to  become 
familiar  with  the  three  elements  that  make  up  the  cost  of  production, 
namely : 

1.  Direct  Material, 

2.  Direct  Labor. 

3.  Factory  Expense. 

These  three  groups  should  include  every  expenditure  essential  to  manu- 
facturing the  product  into  its  finished  stage  ready  for  sale. 

Before  taking  up  the  accounts  generally  kept  to  bring  these  elements 
together  in  a  "Cost  of  Goods  Manufactured"  or  Manufacturing  Account, 
let  us  analyze  briefly  each  of  these  three  elements. 

DIRECT  MATERIAL 

The  first  cost  in  the  manufacture  of  any  product  is  the  material  from 
which  it  is  made.  This  is  called  direct  material,  and  of  course  should  con- 
sist of,  not  only  the  amount  paid  for  the  material  itself,  but  also  the  cost  of 
transportation — freight,  cartage,  etc. — necessary  in  getting  it  to  the 
factory. 

There  are  three  classes  of  direct  material,  namely,  raw  material,  pur- 
chased parts,  and  manufacturing  supplies.  It  is  generally  the  best  practice 
to  keep  a  separate  ledger  account  for  each  class  of  material. 

Raw  material  is  anything  which  undergoes  some  process  in  the  factory 
before  becoming  a  part  of  the  product;  for  example,  woolen  yarn  in  a 
textile  mill  and  lumber  in  a  furniture  factory. 

Purchased  parts  is  direct  material  which  undergoes  no  change,  but 
becomes  a  part  of  the  product  merely  by  attachment  or  assembly.  In  an 
automobile  factory,  for  example,  such  items  as  the  bodies,  steering  gears, 
speedometers,  etc.,  can  often  be  purchased  more  cheaply  from  another 
company  than  they  can  be  produced  in  the  factory  itself.    In  some  cases 

Assignment  23,  Page  2 


these  parts  must  be  purchased  from  another  concern  because  they  are  made 
by  some  patented  process.  It  is  evident,  as  noted  before,  that  the  finished 
product  of  one  factory  may  become  the  material  for  another  factory.  In 
fact,  some  manufacturing  is  largely  a  matter  of  assembling,  very  little 
actual  processing  of  material  being  performed. 

Manufacturing  supplies  are  direct  material,  which  include  such  items 
as  nails,  glue,  etc.,  in  a  furniture  factory,  and  buttons,  thread,  etc.,  in  a 
clothing  factory,  that  are  essential  material  in  manufacture.  These  sup- 
plies should  not  be  confused  with  general  mill  supplies,  like  oil,  grease, 
brooms,  tissue,  etc.,  or  supplies  needed  for  repairs,  all  of  which  are  factory 
expense  items  and  not  direct  material. 

The  test  of  what  is  direct  material  might  be  stated  thus :  All  material 
which  goes  in  substance  into  the  product  manufactured  is  direct  niaterial. 
All  material  that  is  consumed  in  the  operation  of  the  factory  is  indirect 
material. 

DIRECT  LABOR 
The  second  important  element  of  the  cost  of  a  manufactured  product  is 
the  labor  which  is  employed  in  making  it.    In  most  factories  labor  is  of 
two  kinds : 

1.  Direct  Labor. 

2.  Indirect  Labor. 

Direct  labor  is  that  which  is  employed  directly  in  processing  the  raw 
materials  or  in  assembling  the  parts  into  the  finished  product.  For  instance, 
in  the  manufacture  of  furniture  the  labor  of  cutting,  planing,  and  finishing 
the  lumber  is  direct  labor.  If  a  workman  receives  $1.00  an  hour  and  spends 
24  hours  in  making  a  desk,  the  labor  cost  is  $24.00. 

The  test  for  direct  labor  is  similar  to  the  test  for  direct  material, 
namely,  whether  the  work  is  used  in  the  actual  production  of  the  article  or 
not.  If  it  is  so  used,  the  labor  cost  is  said  to  be  a  direct  cost  of  the  article 
produced. 

On  the  other  hand,  there  is  a  lot  of  labor  employed  in  every  factory, 
like  janitor's  labor  to  keep  the  factory  clean,  that  of  repair  men  to  make 
repairs,  etc.,  which  is  called  indirect.  Such  labor  cannot  be  charged 
directly  to  any  product  or  article  being  manufactured,  but  must  be  dis- 
tributed over  the  entire  output  for  a  period.  It  is  therefore  considered  a 
part  of  the  factory  expense,  explained  in  the  next  paragraph. 

FACTORY  EXPENSE 
The  third  element  of  cost  of  production  includes  all  expenses  arising 
from  the  operation  of  the  factory  which  cannot,  like  material  and  direct 
labor,  be  definitely  traced  to  the  product.     Some  of  the  most  important 
expenses  are: 

Superintendence.  Taxes  on  Plant  and  Equipment. 

Indirect  Labor.  Insurance  on  Plant  and  Equipment. 

Light  and  Heat.  Rent. 

Power.  Repairs. 

Water.  Mill  Supplies. 

Depreciation  of  Plant  and  Equipment. 

Assignment  23,   Page  3 


These  expenses  are  incurred  on  account  of  the  process  of  manufacture 
and  not  for  selling  or  general  administration;  hence  they  are  a  true  part 
of  the  cost  of  production. 

What  is  Meant  by  Prime  Cost.  The  three  elements  of  cost — namely, 
direct  material,  direct  labor,  and  factory  expense — naturally  fall  into  two 
groups.  The  direct  costs,  direct  material,  and  direct  labor  make  up  one 
group,  which  is  called  prime  cost,  and  factory  expense  constitutes  a  second 
group,  generally  called  indirect  cost  or  overhead. 

Accordingly,  accountants  make  use  of  the  two  following  equations  in 
determining  the  cost  of  production: 

1.  Direct  Material  +  Direct  Labor  =  Prime   Cost. 

2.  Prime  Cost  +  Factory  Expense  =  Total  Factory  Cost. 

For  example,  in  1921  the  Cross  Manufacturing  Company  used  raw 
material  to  the  amount  of  $208,100.00,  had  a  direct-labor  pay  roll  of 
$333,000.00,  and  factory  expense  amounting  to  $186,900.00.  The  total 
cost  of  production  is  this  case  can  be  graphically  shown,  as  in  Figure  1. 


Factory 
Expense 

$186,900.00 

Factory 
Cost 

$728,000.00 

Direct 
Labor 

$333,000.00 

Prime 
Cost 

$541,100.00 

Raw 
Material 

$208,100.00 

Chart  Showing  Elements  of  Factory  Cost 

Figure  1.    You  will  notice  how  the  two  direct  costs,  material  and  labor,  when  added 
together  make  up  prime  cost,  and  also  how  factory  expense  plus  prime  cost  equals 

factory  cost. 


PROBLEM  DEMONSTRATION 

In  order  that  we  may  know  how  to  determine  the  cost  of  production, 
and  how  to  set  up  the  financial  statements  for  a  manufacturing  business, 
we  will  take  the  following  trial  balance  of  the  Beaver  Manufacturing  Com- 
pany: 


Assignment  23,  Page  4 


BEAVER  MAtraFACTURING  COMPANY 
Trial  Balance,  December  31,   1921 


Cash  in  Bank 

Petty  Cash  Fund  

Accounts  Receivable  

Reserve  for  Doubtful  Accounts  

Notes  Receivable  

Raw  Material  Inventory,  Jan.  1,  1921  

Goods  in  Process  Inventory,  Jan.  1,  1921  .  .  .  . 
Finished  Goods  Inventory,  Jan.  1,  1921  .  . 

Machinery  and  Tools  

Furniture  and  Fixtures  

Buildings  

Reserve  for  Depreciation  

Land 

Insurance  Unexpired  

Notes  Payable  

Accounts  Payable  

Wages  Accrued  

Interest  Accrued  

Taxes  Payable 

Capital  Account  

Sales  

Sales  Returns  and  Allowances  

Raw  Material  Purchases  

Freight  on  Purchases  

Direct  Labor  

Indirect  Labor  

Factory  Supplies  

Heat  and  Power  

Repairs  to  Machinery  and  Tools  

Depreciation  of  Buildings,  Machinery,  Tools  .  .  . 
Insurance  on  Factory  Building  and  Contents  .  .  . 

Taxes  on  Factory  Building  and  Equipment  

Miscellaneous  Factory  Expenses  

Salesmen's  Salaries  

Salesmen's  Traveling  Expense  

Advertising  

Freight  on  Sales  

Office  Expense  of  Selling  Department  

General  Office  Salaries  

Office  Supplies  

Stationery  and  Printing  

Telephone  and  Telegraph  

Miscellaneous  Office  Expense  

Depreciation  apportioned  to  General  Office  .  .  . 
Insurance  and  Taxes  apportioned  to  General  Office 

Bad  Debts  Expense  

Purchase  Discounts  

Interest  Earned  . 

Interest  Expense  

Sales  Discounts  


Debits 

Cred  its 

$   6,850 

00 

100 

00 

85,680 

00 

$  1,523 

25 

30,500 

00 

28,762 

20 

20,351 

20 

11,000 

00 

65,700 

00 

3,500 

00 

25,000 

00 

15,540 

00 

15,000 

00 

325 

00 

10,000 

00 

60,480 

75 

1,200 

00 

300 

00 

500 

00 

167,584 

25 

270,736 

55 

7,132 

50 

81,850 

50 

5,424 

00 

61,960 

50 

22,785 

70 

2,350 

00 

3,230 

00 

965 

00 

7,170 

00 

1,360 

00 

450 

00 

680 

25 

7,740 

00 

4,675 

00 

8,283 

20 

2,811 

25 

4,228 

00 

4,888 

00 

1,372 

00 

400 

00 

75 

00 

731 

00 

600 

00 

112 

00 

891 

50 

1,835 

00 

400 

00 

600 

00 

4,566 

00 

$530,099 

80 

$530,099 

80 

Trial  Balance  Before  Closing 

Figure  2.    This  trial  balance  shows  the  accounts  on  the  books  of  the  Beaver  Manu- 
facturing Company.     From  this  Trial  Balance  statements  are  prepared,  as  shown  in 

Figrures  6  and  7 

Assig^nment  23,  Page  5 


The  physical  inventories  taken  at  December  31,  1920,  show  the  follow- 
ing totals: 

Raw  Material  and  Supplies „...$20,060.50 

Goods  in  Process 14,940.00 

Finished  Goods  -_ 33,500.00 

The  nominal  accounts  of  this  trial  balance  will  be  closed  into  three 
summary  accounts,  as  follows: 

1.  Manufacturing  Account — For  the  purpose  of  determining  the  cost  of 
goods  manufactured  during  the  period. 

2.  Trading  Account — For  the  purpose  of  determining  the  gross  profit 
from  sales. 

3.  Profit  and  Loss  Account — For  the  purpose  of  determining   the  net 
profit  from  operations. 

Entries  to  Be  Made  in  the  Manufacturing  Account.  The  Manufactur- 
ing Account  is  set  up  at  the  time  of  closing  the  books  as  a  summary 
account  for  all  the  costs  and  expenses  of  manufacture  for  the  period.  The 
inventories  for  both  raw  materials  and  goods  in  process  on  January,  1921, 
will  be  charged  to  this  summary  account.  The  cost  of  the  raw  material 
purchased  during  the  period,  including  the  freight  and  cartage  to  bring 
it  into  the  factory,  the  direct  labor,  and  all  the  factory  expenses  necessary 
in  maintaining  and  operating  the  factory,  will  likewise  be  charged  to 
this  account. 


Manufacturing  Account 

1921 

1921 

Dec. 

31 

Raw-Material  Inven- 
tory Jan.  1,  1921 
Goods  in  Process, 

S  28,762 

20 

Dec. 

31 

Raw  Material  and 
Supplies,  Dec.  31, 
1921 

S  20,060 

50 

Jan.  1,  1921 

20,351 

20 

Goods  in  Process 

14,940 

00 

Raw-Material  Pur- 

Cost of  Production 

202,338 

85 

chases 

81,850 

50 

Freight  on  Purchases 

5,424 

00 

Direct  Labor 

61,960 

50 

Indirect  Labor 

22,785 

70 

Factory  Supplies 

2,350 

00 

Heat  and  Power 

3,230 

00 

Repairs  to  Machinery 

965 

00 

Depreciation--Build- 

ing,  Machinery,  and 

Tools 

7,170 

00 

Insurance 

1,360 

00 

Taxes  on  Factory 

Buildings  and 

Equipment 

450 

00 

Miscellaneous  Factory 

Expenses 

680 

25 

$237,339 

35 

$237,339 

35 

The  M.^nufacturing  Account 

Figure  3.  Every  debit  in  this  account  is  offset  by  a  credit  in  another  account.  For 
example,  when  we  charge  the  Manufacturing  Account  with  $28,762.20  Raw  Miaterials, 
we  also  credit  the  Raw-Materials  Inventory  Account  with  the  same  amount,  thus 
closing  that  account,  etc.  Every  credit  in  the  Manvifacturing  Account  is  likewise  offset 
by  a  corresponding  debit  in  another  account.  Thus  you  see  what  we  mean  when  we 
say  the  Manufacturing  Account  is  a  summary  account. 


Assignment  23,   Page  6 


This  gives  us  the  total  expenditures  for  manufacturing.  In  order  to 
determine  the  cost  of  production,  it  is  necessary  to  credit  the  Manufactur- 
ing Account  with  the  inventories  of  raw  materials  and  goods  in  process 
on  December  31,  1921.  The  balance  of  the  Manufacturing  Account,  as 
shown  below,  will  now  be  the  cost  of  production,  amounting  to  $202,338.85. 

The  Trading  Account.  The  Trading  Account  is  charged  with  the 
finished  goods  on  hand  at  the  beginning  of  the  year.  The  cost  of  goods 
manufactured  ($202,338.85)  is  then  carried  from  the  Manufacturing  Ac- 
count into  the  Trading  Account  as  a  debit.  The  following  journal  entry 
should  be  made  to  record  this  transfer  on  the  books,  as  one  of  the 
closing  entries. 

Dec.  31,  1921  Trading  Account $202,338,85 

Manufacturing  Account $202,338.85 

To  close  the  cost  of  goods  manufactured  during 
the  period  into  the  Trading  Account. 

The  Trading  Account  is  then  credited  with  the  inventory  of  finished 
goods  on  hand  at  the  close  of  the  period,  $33,500.00. 

Return  Sales  and  Allowances  are  closed  into  the  Sales  Account  and 
the  net  sales  is  credited  to  the  Trading  Account,  thus: 


Dec.  31,  1921  Sales 

Return  Sales  and  Allowances 

To  charge  the  Sales  Account  with  the  return 
sales  and  allowances. 


$7,132.50 


$7,132.50 


Sales $263,604.05 

Trading  Account $263,604.05 

To  close  net  sales  into  Trading  Account 

After  these  entries  have  been  made  the  Trading  Account  will  have 
a  balance  of  $83,765.20,  as  shown  in  Figure  4. 


Trading  Account 


1921 
Dec. 


31 


Finished  Goods,  Jan. 

31,  1921 
Cost  of  Production 
Gross  Profit  carried 

to  Profit  and  Loss 


$  11,000 
202,338 

83,765 

00 
85 

20 

1921 

Dec. 

31 

$297,104 

05 

Net  Sales 

Finished  Goods,  Dec. 
31,  1921 


$263,604 
33,500 


$297,104 


05 


Trading  Account  After  the  Manutacturing  Account  Is  Closed  Into  It 

Figure  4.    Note  especially  how  the  cost  of  production  is  carried  from  the  Manufactur- 
ing Account  into  the  Trading  Account 

The  Profit  and  Loss  Account.  The  gross  profit  from  sales  as  shown 
in  the  Trading  Account  is  then  transferred  to  the  Profit  and  Loss  Account 
by  the  following  entry: 


Assignment  23,  Page   7 


Dec.  31,  1921  Trading  Account $83,765.20 

Profit  and  Loss $83,765.20 

To  transfer  gross  profit  from  Trading  to  Profit  and 
Loss  Account. 

When  all  the  expense  accounts  have  been  closed  into  the  Profit  and 
Loss  Account,  it  will  appear  as  in  Figure  5. 


Profit  and  Loss  A 

CC( 

)unt 

1921 

1921 

Dec. 

31 

Salesmen's  Salaries 
Salesmen's  Traveling 

$  7,740 

00 

Dec. 

31 

Gross  Profit 
Purchase  Discounts 

$83,765 
1,835 

20 
00 

Expenses 

4,675 

00 

Interest  Earned 

400 

00 

Advertising 

8,283 

20 

Freight  on  Sales 

2,811 

25 

Office  Expense,  Sell- 

ing Dept. 

4,228 

00 

General  Office  Sal- 

aries 

1  4,888 

00 

Office  Supplies 

1  1,372 

00 

1 

Stationery  and  Print- 

ing 

400 

00 

Telephone  and  Tele- 

graph 

75 

00 

Miscellaneous  Office 

Expenses 

731 

00 

Depreciation 

600 

00 

Insurance  and  Taxes 

112 

00 

Bad  Debts 

891 

50 

Interest  Expense 

600 

00 

Sales  Discounts 

4,566 

00 

Net  Profit  carried  to 

Capital  Account 

44,027 

25 

$86,000 

20 

$86,000 

20 

' 

^_ 

1   1- 

The  Profit  and  Loss  Account 

Figure  5.    This  account,  as  you  note,  is  a  summary  of  all  costs  and  expenses  and  of 

all  incomes  for  the  period. 

The  final  balance  of  the  Profit  and  Loss  Account,  amounting  to 
$44,027.25,  is  the  net  profit  for  the  year.  This  amount  is  finally  trans- 
ferred by  journal  entry  to  the  credit  of  the  Capital  Account. 

The  Profit  and  Loss  Account  is  sometimes  divided  into  two  sections. 
The  expenses  and  income  from  operations  would  then  be  put  into  the  first 
section,  which  results  in  a  balance  called  net  profit  from  operations. 

This  balance  is  then  transferred  to  the  second  section,  the  Income 
Account.  The  financial  items,  like  interest  and  discounts  as  well  as  any 
other  nonoperating  expense  or  income,  are  summarized  in  this  account, 
which  results  in  the  net  profit  or  net  income  for  the  year.  This  procedure 
for  the  ledger  is  in  harmony  with  the  arrangement  on  the  Statement  of 
Profit  and  Loss,  and  for  that  reason  is  recommended  by  some  accountants. 
For  ledger  purposes,  however,  it  appears  to  be  unnecessary. 

These  three  accounts,  Manufacturing,  Trading,  and  Profit  and  Loss, 
as  shown  above,  are  used  merely  as  summary  accounts  in  the  closing 
process.    There  is  no  need,  therefore,  for  opening  up  these  accounts  on 


A.ssignment  23,  Page  8 


the  ledger  except  at  the  time  of  closing  the  books.  They  serve  only  as 
clearing  accounts,  in  order  to  bring  the  net  profit  for  the  period  into  the 
Capital  Account.  At  the  beginning  of  the  next  period  new  nominal 
accounts  are  opened. 

Those  in  charge  of  the  business,  however,  desire  information  on  manu- 
facturing costs,  income  from  sales,  and  general  expenses.  To  meet  this 
need,  the  accountant  is  expected  to  prepare  two  operating  statements, 
showing  all  the  costs  and  incomes  properly  classified. 


1. 
2, 


The  Manufacturing  Statement. 
The  Profit  and  Loss  Statement. 


The  Manufacturing  Statement.  A  manufacturing  statement  should 
show  all  the  costs  of  raw  material,  direct  labor,  and  all  the  manufacturing 
expenses.  In  other  words,  it  is  a  reproduction  of  the  Manufacturing  Ac- 
count, only  in  a  different  form.  For  example,  the  manufacturing  state- 
ment of  the  Beaver  Manufacturing  Company  will  appear  thus: 


THE  BEAVER  MANUFACTURING  COMPANY 

Manufacturing  Statement 

For  the  Year  Ended  December  31,  1921 

Goods  in  Process  Jan.   1,  1921  

Raw  Materials  Used: 

Inventory  Jan.   1,  1921 

$  28,762.20 

81,850.50 

5,424.00 

S  95,976.20 
61,960.50 

$20,351.20 
$196,927.65 

Purchases  

Freight  on  Purchases 

Deduct  Inventory  Dec.  31,  1921 

Direct  Labor 

$116,036.70 
20,060.50 

$     2,350.00 

22,785.70 

3,230.00 

965.00 

7,170.00 

1,360.00 

450.00 

680.25 

Prime  Cost 

$157,936.70 
38,990.95 

Manufacturing  Expenses: 
Factory  Supplies 

Indirect  Labor 

Heat  and  Power 

Repairs  to  Machinery  and  Tools 

Depreciation  of  Buildings,  Machinery,  and 
Tools  

Insurance  

Taxes  

Miscellaneous  Factory  Expenses 

Total  Manufacturing  Charges  

Deduct  Goods  in  Process  Dec.  31,  1921   

Net  Cost  of  Production 

$217,278.85 
14,940.00 

$202,338.85 

The  Manufacturing  Statement 

Figure  6.    You  will  notice  that  the  same  figures  are  used  in  the  statement  as  were 

used  in  the  Manufacturing  Account.    The  statement  is  in  report  form,  so  as  to  show 

in  a  logical  way  the  various  elements  of  manufacturing  cost.    The  cost  of  production 

is  taken  over  into  the  Profit  and  Loss  Statement,  in  Figure  7. 

Assignment   23,   Page   9 


THE  BEAVER  MANUFACTURING  COMPANY 

Profit  and  Loss  Statement 

Year  Ending  December  31,  1921 


GroBB  Sales  

Deduct: 
Return  Sales  and  Allowances 


Net  Sales 


Cost  of  Goods  Sold: 

Finished  Goods  Inventory,  Jan.  1,  1921. 
Cost  of  Goods  Manufactured 


Deduct  Finished  Goods  Inventory,  Dec.  31,  1921. 


Gross  Profit  on  Sales  

Deduct: 

Selling  Expenses: 

Salesmen's  Salaries  

Salesmen's  Traveling  Expenses 

Advertising  

Freight  on  Sales 

Office  Expenses  


Net  Selling  Profit 

Deduct: 

General  Administrative  Expenses: 

General  Office  Salaries  .  .  . 

Office  Supplies  

Stationery  and  Printing  .  .  . 

Telephone  and  Telegraph  .  .  . 

Miscellaneous  Office  Expense. 

Depreciation 

Insurance  

Bad  Debts  


Net  Profit  from  Operations 

Add: 

Nonoperating  Income: 
Discount  on  Purchases 
Interest  earned  .  .  . 


Deduct: 

Nonoperating  Expenses: 

Interest  Expense.    . 

Discount  on  Sales  .    . 


Net  Profit. 


$270,736.55 
7,132.50 


$  11,000.00 
202,338.85 


$213,338.85 
33.500.00 


7,740.00 
4,675.00 
8,283.20 
2,811.25 
4,228.00 


4,888.00 
1,372.00 
400.00 
75.00 
731.00 
600.00 
112.00 
891.50 


$     1,835.00 
400.00 


$         600.00 
4,566.00 


$263,604.05 


179,838.85 


83,765.20 


27,737.45 


$  56,027.75 


9,069.50 


S  46,958.25 


2,235.00 


$49,193.25 


5,166.00 


$  44,027.25 


The  Puofit  and  Loss  Statement 

Figure  7.  This  Profit  and  Loss  Statement  is  practically  the  same  as  that  used  for 
trading  concerns.  The  only  difference  is  in  the  Cost  of  Goods  Sold  Section.  In  place 
of  the  purchases,  we  have  the  cost  of  production,  which  amount  is  taken  over  from 

the  Manufacturing  Statement. 


Assignment  23,  Page  10 


Now  we  shall  set  up  the  Profit  and  Loss  Statement,  which  will  contain 
the  same  items  as  appeared  in  the  Profit  and  Loss  and  Trading  Accounts, 
only  in  a  different  arrangement.  The  main  purpose  of  the  statement  is 
to  present  the  operations  of  the  business  so  as  to  show  clearly  the  various 
elements  contributing  to  the  final  profit. 

Notice  that  the  accountant  arranges  these  figures  so  that  the  operating 
transactions  may  be  intelligently  interpreted  by  those  who  control  the 
business. 

You  are  now  familiar  with  the  form  and  purpose  of  the  Manufacturing 
Statement.  It  is  primarily  a  means  of  ascertaining  the  cost  of  production. 
As  you  have  noted  in  both  the  account  and  the  statement  above,  in  order 
to  determine  this  amount  it  was  necessary  to  take  an  inventory  of  the 
raw  materials  at  the  end  of  the  period  before  we  could  determine  the  cost 
of  raw  materials  used  in  production.  If  all  the  materials  that  were  put 
in  process  during  the  year  were  manufactured  into  the  finished  product 
in  the  same  period,  there  would  be  no  goods  in  process  at  the  end  of  the 
year.  In  any  manufacturing  enterprise,  however,  there  are  usually  some 
materials  in  process  of  manufacture  at  the  close  of  the  year.  Some 
labor  has  been  performed  upon  them  and  a  part  of  the  overhead  expenses 
also  belongs  to  them.  The  cost  of  goods  in  process  is  therefore  made 
up  of  material,  labor,  and  overhead. 

Need  for  Perpetual  Inventory  Records.  Most  manufacturers,  how- 
ever, cannot  wait  until  the  end  of  the  year,  when  an  inventory  is  taken, 
to  find  out  the  cost  of  manufacturing  their  product.  They  want  to  know 
the  cost  of  doing  business  monthly.  This  means  that  some  record  must 
be  maintained  which  will  show  the  amount  of  raw  materials,  work  in 
process,  and  finished  goods  at  the  end  of  each  month. 

We  know  that  if  we  add  the  inventory  of  raw  materials  at  the  begin- 
ning of  the  month  to  the  purchases  during  the  month,  and  deduct  from 
this  sum  the  cost  of  the  materials  used  in  manufacturing,  the  result  will 
be  the  value  of  raw  materials  on  hand  at  the  close  of  the  month. 

To  have  such  a  record  for  the  raw  material,  we  must  put  the  materials 
in  a  storeroom  and  keep  a  Stores  Ledger  Account  with  each  size  and 
kind  of  material,  showing  quantities  and  values  received  and  the  quantities 
and  values  delivered  out  of  the  storeroom  to  the  factory.  QUANTITY 
RECEIVED  MINUS  QUANTITY  DELIVERED  EQUALS  QUANTITY  ON 
HAND  at  any  moment  of  time.  In  this  way  we  have  what  is  called  a 
PERPETUAL  INVENTORY  of  raw  materials. 

Your  next  lesson  will  show  you  how  this  perpetual  inventory  is  main- 
tained. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

In  this  Assignment  you  have  begun  the  study  of  one  of  the  most 
important  and  interesting  phases  of  accounting,  namely.  Factory  Ac- 
counting. Thruout  the  Assignment  we  have  illustrated  and  explained 
the  following  principles: 

Assignment   23,   Page   11 


First.  Factory  Accounting  is  like  accounting  for  trading  concerns,  except 
that  you  have  the  added  problem  of  finding  the  cost  of  production. 

Second.    The  cost  of  production  is  made  up  of  three  main  costs : 

1.  Direct  Material. 

2.  Direct  Labor. 

3.  Factory  Expenses. 

Third.  Two  formulas  are  used  by  accountants  in  determining  the  cost  of 
production : 

1.  Direct  Material+Direct  Labor=Prime  Cost. 

2.  Prime  cost+Factory  Expenses=Cost  of  Production. 

Fourth.  When  the  ledger  is  closed,  the  three  elements  of  the  cost  of  pro- 
duction are  summarized  in  the  Manufacturing  Account.  The 
balance  of  this  account,  representing  the  cost  of  production,  is 
carried  to  the  Trading  Account  as  a  debit. 

Fifth.  The  various  costs  of  production  are  also  classified  and  summarized 
in  the  Manufacturing  Statement  in  such  a  way  that  those  in  charge 
of  the  business  can  make  an  intelligent  analysis. 

Sixth.  The  final  amount  determined  as  the  cost  of  production  in  the  Manu- 
facturing Statement  is  taken  over  in  the  Profit  and  Loss  State- 
ment, Cost  of  Goods  Sold  section,  where  the  amount  of  purchases 
usually  appears. 

Seventh.  In  the  illustrative  problem  of  this  assignment  it  is  assumed  that 
physical  inventories  are  taken  annually  for  raw  materials  and  sup- 
plies. In  the  next  Assignment  the  perpetual  inventory  plan  will 
be  explained. 


Assignment  23,  Page   12 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  23. 

Send  in  solutions  for  the  following  problems,  all  of  which  are  taken 
from  the  Drexel  Motor  Company. 

The  accountant  of  the  Drexel  Motor  Company  prepared  a  trial  balance 
from  the  general  ledger  at  December  31,  1921  as  follows : 

Trial  Balance,  December  31,  1921 


Cash  in  bank  

Petty  Cash  

Accounts  Receivable 

Allowance  for  Bad  and  Doubtful  Accounts 

Notes  Receivable  

Inventories  at  Jan.  1,  1921: 

Raw  Materials 

Motors  in  Process 

Finished  Motors 

Office  Furniture  and  Fixtures 

Allowance  for  Depreciation  Office  Furniture  and  Fixtures 

Factory  Furniture  and  Fixtures   

Allowance  for  Depreciation  Factory  Furniture  and  Fixtures 

Tools 

Patterns 

Allowance  for  Depreciation  of  Patterns   

Machinery 

Allowance  for  Depreciation  of  Machinery 

Buildings 

Allowance  for  Depreciation  of  Buildings 

Land 

Notes  Payable 

Accounts  Payable  

Mortgage  Payable  

Capital  Account 

Motor  Sales 

Motor  Sales  Returns  and  Allowance 

Raw  Materials  Purchases 

Raw  Materials  Pur.  Returns  and  Allowances 

In-Freight  and  Drayage  

Direct  Labor  

Indirect  Labor  

Manufacturing  Supplies  

Machinery  Repairs 

Light,  Heat,  and  Power  

Insurance  on  Factory  Materials  

Insurance  on  Building  and  Equipment 

Taxes 

Miscellaneous  Factory  Expenses  

Salesmen's  Salaries 

Salesmen's  Commissions  

Salesmen's  Traveling  Expenses 

Out-Freight  and  Shipping  Expense  

Advertising 

Miscellaneous  Selling  Expenses  

Office  Salaries 

Office  Supplies 

Miscellaneous  Office  Expenses 

Purchases  Discounts 

Interest  Earned 

Sales  Discounts 

Interest  Expense   


DEBITS 

CREDITS   1 

$  10,114 

55 

150 

00 

110,472 

05 

S  3,519 

72 

5,640 

10 

25,240 

16 

15,970 

20 

42,490 

70 

1,240 

00 

620 

00 

8,100 

00 

3,190 

20 

5,140 

17 

7,500 

00 

5,405 

14 

72,520 

70 

21,490 

16 

125,000 

00 

50,000 

00 

30,000 

00 

10,000 

00 

62,490 

35 

15,000 

00 

239,919 

34 

375,198 

67 

10,240 

80 

165,460 

18 

9,840 

60 

1,460 

24 

65,918 

60 

20,372 

40 

4,620 

85 

575 

00 

8,917 

18 

820 

00 

1,890 

00 

2,850 

00 

1,269 

25 

19,690 

75 

4,610 

15 

8,111 

25 

590 

20 

3,800 

00 

3,175 

30 

12,210 

40 

720 

20 

1,810 

65 

8,375 

90 

282 

00 

5,440 

05 

1,200 

00 

08 

$805,332 

08 

$805,332 

=^= 

= 

— 

= 

Assignment   23,   Page   13 


At  December  31, 1921,  physical  inventories  were  taken.  The  cost  values 
were  as  follows: 

Raw  Materials  $31,216.15 

Motors   in   Process _ 18,793.80 

Finished  Motors  31,470.95 

Before  closing  the  books  the  accountant  found  it  necessary  to  make 
entries  for  depreciation  based  upon  the  cost  value  as  shown  on  the  books 
as  follows: 

Office  Furniture  and  Fixtures.— 10% 

Factory  Furniture  and  Fixtures 10% 

Buildings   2% 

Machinery   10% 

Patterns  20% 

Instead  of  depreciating  tools,  a  physical  inventory  was  taken  and  the 
tools  on  hand  amounted  to  $4,800.25.  Hence  the  difference  between  the 
value  on  the  books  and  the  inventory  value  must  be  credited  to  Tools  Ac- 
count and  charged  to  Tools  Expense. 

Five  per  cent  of  the  light,  heat,  and  power  is  to  be  charged  to  profit 
and  loss  as  an  administrative  expense  and  the  balance  to  manufacturing. 

Depreciation  of  buildings  is  to  be  charged  80  per  cent  to  manufacturing 
and  20  per  cent  to  profit  and  loss. 

Insurance  on  building  and  equipment  is  to  be  charged  85  per  cent  to 
manufacturing  and  15  per  cent  to  profit  and  loss. 

Taxes  are  to  be  charged  85  per  cent  to  manufacturing  and  15  per  cent 
to  profit  and  loss. 

An  additional  reserve  of  $500.00  is  to  be  provided  for  bad  debts. 

PROBLEM  1 
Assume  that  you  are  the  accountant  of  the  Drexel  Motor  Manufactur- 
ing Company.  You  are  to  prepare  the  journal  entries  to  place  the  depre- 
ciation for  the  year  1921  on  the  books  and  then  to  apportion  expenses,  as 
indicated  above,  so  that  the  Manufacturing  Account  will  bear  no  more 
than  its  share  of  the  burden. 

PROBLEM  2 
You  find  that  the  following  expenses  are  accrued  at  December  31,  1921. 
These  expenses  belong  to  the  operations  of  the  year  1921,  but  will  be  paid 
sometime  in  January. 

Sales  Commission  $319.40 

Interest  _ 150.00 

Prepare  journal  entries  to  put  these  accrued  expenses  on  the  books. 

PROBLEM  3 
You  also  find  that  the  following  items  have  been  included  in  expense 
accounts  but  that  they  must  be  set  up  as  prepaid  expenses  because  they 
have  been  paid  and  will  be  expenses  in  the  year  1922. 

Assignment  23,   Page    14 


Manufacturing  Supplies,  Coal,  Waste,  Oil,  etc.$125.00 

Advertising   300.00 

Insurance  on  Factory  Materials 125.00 

Prepare  journal  entries  to  record  these  deferred  charges  on  the  books. 

PROBLEM  4 
After  the  entries  are  made  for  the  above  transactions  the  accountant 
proceeds  to  close  the  nominal  accounts  thru  the  Manufacturing,  Trading, 
and  Profit  and  Loss  Accounts.  These  journal  entries  have  been  prepared 
for  you  to  show  you  the  method  of  closing,  and  to  save  your  time  in  pre- 
paring the  Manufacturing,  Trading,  and  Profit  and  Loss  Accounts. 

In  addition  to  those  which  you  have  prepared  for  Problem  1  to  appor- 
tion light,  heat,  and  power,  depreciation  of  buildings,  insurance  on  build- 
ings, equipment,  and  taxes,  the  following  journal  entries  are  necessary 
to  close  the  Manufacturing,  Trading,  and  Profit  and  Loss  Accounts. 

Dec.  31,  1921,  Manufacturing  Account $  41,210.36 

Trading  Account 42,490.70 

Raw  Material  Inventory $  25,240.16 

Motors  in  Process  Inventory  15,970.20 

Finished  Motors  Inventory  42,490.70 

To  close  inventories  of  Jan.  1,  1921 

Raw  Materials  Inventory $  31,216.15 

Motors  in  Process  Inventory 18,793.80 

Finished  Motors  Inventory 31,470.95 

Manufacturing  Account  $  50,009.95 

Trading  Account  31,470.95 

To  place  on  the  books  the  inventories  of  December  31,  1921 

Raw  Materials  Purchase  Returns  and  Allowances.  .  .  $  9,840.60 

Raw  Materials  Purchases  $  9,840,60 

To  close  the  purchase  returns  and  allowances 
into  the  purchase  account. 

Manufacturing  Account $155,619.58 

Raw  Material  Purchases $155,619,58 

To  close  net  purchases  into  Manufacturing 

Manufacturing  Account $104,688.33 

Freight  and  Drayage  $  1,460.24 

Direct  Labor 65.918.60 

Indirect  Labor 20,372.40 

Manufacturing  Supplies 4,495.85 

Machinery  Repairs  575.00 

Insurance  on  Factory  Materials 695.00 

Depreciation  of  Machinery  7,252.07 

Depreciation  of  Patterns.  .     1,500.00 

Depreciation  of  Furniture  and  Fixtures 810.00 

Tools  Expense  339.92 

Miscellaneous  Factory  Expense  1,269.25 

To  close  into  Manufacturing  Account 

Assignment  23,  Page  15 


Motor  Sales $  10,240.80 

Motor  Sales  Returns  and  Allowances 8  10,240.80 

To  close  return  sales  and  allowances  into  Sales  Account 


Motor  Sales $364,957.87 

Trading  Account  $364,957.87 


To  close  net  sales  into  Trading  Account. 


Profit  and  Loss  Account $  62,152.35 

Salesmen's  Salaries  $  19,690.75 

Salesmen's  Commission  4,929.55 

Salesmen's  Traveling  Expenses  8,111.25 

Out-Freight  and  Shipping 590.20 

Advertising  3,500.00 

Miscellaneous  Selling  Expenses 3,175.30 

Office  Salaries  12,210.40 

Office  Supplies  720.20 

Miscellaneous  Office  Expenses  1,810.65 

Depreciation  of  Office  Furniture  and  Fixtures  .  124.00 

Bad  Debts  Expense  500.00 

Sales  Discount 5,440.05 

Interest  Expense 1,350.00 

To  close  into  Profit  and  Loss  Account. 


Discount  on  Purchases $  8,375.90 

Interest  Earned  282.00 

Profit  and  Loss  Account .  $  8,657.90 

To  close  into  Profit  and  Loss. 


You  are  to  prepare  the  journal  entries  to  show  the  transfer  of 

(a)  Manufacturing  Cost  to  Trading  Account. 

(b)  Gross  Profit  from  Trading  to  Profit  and  Loss  Accounts. 

(c)  Net  Profit  from  Profit  and  Loss  Account  to  the  proprietor's 
Capital  Account. 

Submit  the  Manufacturing-,  Trading,  and  Profit  and  Loss  Accounts  a& 
they  would  appear  on  the  general  ledger  after  they  are  closed. 

PROBLEM  5 
The  proprietor  of  the  Drexel  Manufacturing  Co.  requests  you  as  his 
accountant  to  prepare  for  him: 

1.  Manufacturing  Statement. 

2.  Profit  and  Loss  Statement. 

3.  Balance  Sheet. 

Submit  all  your  work  to  the  University  for  grading. 


Assignment  23,  Page  16 


Higher  Accountancy 

P'  ==3a 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  24 

FACTORY  ACCOUNTING 

PERPETUAL  INVENTORY 


OUCCESSFUL  operation  of  any  business  —  manufaC' 
^  turing,  wholesale,  retail — requires  exact  information 
about  every  detail  of  the  business.  The  information  must 
be  complete  enough  and  detailed  enough  to  give  the 
executives  who  are  responsible  for  the  operation  of  the 
business  exact  knowledge  of  its  every  detail. 

CHARLES  R.  STEVENSON 

Qeneral  Manager 

National  Veneer  Products  Company 


LaSalle  Extension  University 

Chicago 


NHA-24 
1-43 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSmi.e  Extfnsiov  Univfrsity 

printed  in  the  u.  s.  a. 


FACTORY  ACCOUNTING 
PERPETUAL  INVENTORY— USE  OF  COST  SHEETS 

The  Beaver  Manufacturing  Company,  referred  to  in  the  preceding 
assignment,  had  practically  no  accounting  method  of  controlling  and  safe- 
guarding its  stores  of  raw  material  and  stock  of  finished  goods.  When 
material  was  received,  it  was  simply  stored  in  the  warehouse,  and  when 
the  goods  were  finished,  they  were  either  sold  or  stored  in  the  stock  room. 
Purchases  and  sales  were  recorded,  but  no  record  was  kept  of  materials 
taken  from  the  storeroom. 

As  a  result,  there  was  no  way  of  knowing  how  much  was  lost  thru  break- 
age or  theft,  and  no  record  was  made  of  such  losses.  The  only  check  up  the 
company  had  was  the  physical  inventory  which  was  taken  at  the  end  of 
the  year.  This,  however,  took  considerable  time,  and  usually  made  it  nec- 
essary to  close  the  plant  for  a  week  or  two. 

With  material  and  goods  passing  continuously  from  one  place  in  the 
factory  to  another,  it  was  practically  impossible  to  take  an  accurate  inven- 
tory, unless  the  factory  ceased  operations. 

The  Beaver  Manufacturing  Company  usually  closed  down  from  Christ- 
mas until  after  New  Year's,  to  allow  sufficient  time  for  taking  inventories. 

On  December  24,  1921,  it  happened  that  the  company  was  crowded  with 
orders.  Most  of  these  were  supposed  to  be  filled  some  time  early  in  Janu- 
ary. Under  such  conditions  the  factory  should  not  have  ceased  operation. 
It  did,  however.  The  result  was  that  when  the  factory  opened  again  on 
January  1,  overtime  work  was  found  necessary,  which  involved  additional 
expense. 

The  company's  accountant  analyzed  the  situation  and  suggested  the 
perpetual  inventory  plan  as  a  remedy. 

What  is  Meant  by  the  Perpetual  Inventory.  The  perpetual  inventory 
plan  consists  of  a  continuous  record  of  all  material  and  supplies  as  they 
are  received  in  the  storeroom,  of  all  material  and  supplies  as  they  are  taken 
out  of  the  storeroom  and  put  into  process,  and  of  all  manufactured  goods 
taken  out  of  the  factory  and  put  in  the  finished-stock  room.  When  goods 
are  sold,  a  record  is  kept  of  all  goods  taken  from  the  stock  room.  If  a 
record  is  kept  of  everything  that  is  received  and  everything  that  is  issued, 
it  is  easy  to  determine  the  amount  on  hand. 

This  plan  requires  some  kind  of  record  for  the  three  inventories.  Usu- 
ally the  records  are  kept  on  cards  in  files,  one  set  for  raw  materials,  another 
for  goods  in  process,  and  a  third  for  finished  stock.  On  these  cards  are 
recorded  both  the  quantities  and  money  values  of  inventories  received, 
issued,  and  balance  on  hand.  Sometimes  only  quantities  are  recorded,  but 
it  is  better  practice,  wherever  possible,  to  record  both  quantities  and 
money  values,  especially  when  controlling  accounts  are  used. 

These  inventory  records  will  be  explained  and  illustrated  later  in  the 
assignment.  First  we  shall  consider  some  of  the  advantages  of  such  a 
system. 


The  Advantages  of  the  Perpetual  Inventory.  When  the  accountant 
suggested  the  plan  for  the  Beaver  Manufacturing  Company,  he  had  no  diffi- 
culty in  showing  that  the  company  was  following  an  inadequate  and  expen- 
sive method  by  closing  down  for  a  week  or  more  to  take  a  physical  inven- 
tory. What  was  needed  was  a  record  that  would  show  currently  the 
amount  of  material  and  finished  goods  on  hand  and  do  away  with  the  peri- 
odic shutdowns. 

He  also  made  it  clear  that  the  perpetual  inventory  can  be  used  in  con- 
trolling the  stores  by  making  occasional  test  counts  of  materials  on  hand. 
When  an  accurate  count  is  made  of  some  kind  of  material,  and  it  is  found 
that  less  material  is  on  hand  than  the  amount  shown  on  the  perpetual  in- 
ventory record,  either  the  record  is  incorrect  or  it  may  be  assumed  that 
some  of  the  material  was  lost  either  thru  theft  or  breakage. 

In  case  materials  and  stock  are  lost  thru  burglary  or  fire,  adjustment 
with  insurance  companies  can  be  made  more  easily  and  quickly  if  a  per- 
petual inventory  is  kept.  ^  ^_    __         ___ 

A  department  store  in  the"State"of  Kansas  wasT^bbed!"  The  proprietor 
made  a  hurried  inspection  of  his  stock  and  estimated  his  loss  at  $400.00. 
Fortunately,  however,  he  had  kept  a  perpetual  inventory  of  merchandise. 
The  insurance  adjuster  checked  up  the  perpetual  inventory  records  and 
found  that  $956.00  worth  of  merchandise  had  been  stolen  instead  of  only 
$400.00. 

The  insurance  company  finally  settled  on  the  basis  of  the  perpetual  in- 
ventory record.  If  the  proprietor  had  not  kept  such  a  record,  either  he 
would  have  lost  money,  provided  his  estimate  had  been  accepted  by  the 
insurance  company,  or  it  would  have  been  necessary  to  take  a  complete 
physical  inventory.  This  would  of  course  have  required  considerable  time 
and  work,  and  settlement  would  have  been  delayed  for  some  time. 

Sometimes  the  perpetual  inventory  records  show  less  than  the  physical 
inventory.  In  such  a  case,  the  difference  can  be  located  and  the  record 
corrected.  In  this  way  inventories  can  be  more  carefully  safeguarded,  and 
more  accurately  accounted  for.  One  large  factory  in  Detroit,  Mich.,  re- 
ports that  it  recently  made  a  test  count  of  more  than  74,000  items  in  the 
stock  room  and  found  that  the  perpetual  inventory  record  was  off  by  less 
than  1-3  of  one  per  cent.  This  difference  was  located  and  the  record  was 
corrected. 

The  Importance  of  Perpetual  Inventory  in  Factory  Accounting.  From 
the  illustrations  given  above,  it  is  evident  that  the  perpetual  inventory 
plan  can  be  used  effectively  in  both  trading  and  manufacturing  concerns. 
It  is  especially  valuable,  however,  in  factory  accounting,  because  it  pro- 
vides an  accurate  control  for  the  many  kinds  of  material  and  supplies  as 
they  pass  thru  the  various  stages  of  the  manufacturing  process.  First  of 
all,  it  is  essential  to  be  familiar  with  these  stages. 

In  any  manufacturing  plant,  there  are  three  distinct  stages  or  steps 
thru  which  raw  material  must  pass  before  it  becomes  a  finished  product. 

1.  The  Raw-Material  Stage. 

2.  The  Goods-in-Process  Stage. 

3.  The  Finished-Goods  Stage. 

Assignment  24,  Page  2 


For  each  of  these  stages  a  controlling  account  is  shown  on  page  19, 
kept  in  the  general  ledger: 

Raw  Materials  Account 

Goods-in-Process  Account  or  Work-in-Process  Account 

Finished-Goods  Account. 

Each  of  these  accounts  in  the  general  ledger  controls  a  subsidiary 
ledger.  If  the  accounts  in  the  subsidiary  ledgers  are  maintained  so  that 
at  any  time,  even  before  the  end  of  the  year,  the  inventory  value  of  these 
three  stages  can  be  determined,  it  will  be  possible  to  ascertain  the  cost  of 
goods  manufactured  without  taking  a  physical  inventory. 

For  example,  the  Raw-Materials  Account  is  a  controlling  account  which 
represents  or  controls  the  individual  accounts  with  each  kind  of  material 
purchased  and  recorded  in  the  stores  ledger.  This  account  is  debited,  and 
Cash,  Vouchers  Payable,  or  Accounts  Payable  is  credited  with  all  goods 
received. 


Dr.  Raw  Materials  

Cr.  Cash,  Vouchers  Payable,  or  Accounts  Payable 


The  Raw-Materials  Account  is  then  credited  with  all  materials  put  in 
process. 

Goods  in  Process  is  an  account  which  controls  the  individual  accounts 
kept  for  the  various  jobs  in  the  cost  ledger.  When  material  is  put  into 
process,  and  labor  and  manufacturing  expenses  are  applied,  the  Goods-in- 
Process  Account  is  debited  thus : 

Dr.  Goods  in  Process  

Cr.  Raw  Materials  

Direct  Labor  

Manufacturing  Expense  

The  Finished-Goods  Account  in  a  similar  manner  controls  the  individ- 
ual accounts  kept  with  each  class  of  stock  in  the  finished-stock  ledger. 
This  account  is  debited  for  all  goods  taken  out  of  the  factory  and  put  in  the 
stock  room  ready  for  sale. 


Dr.  Finished  Goods  .... 
Cr.  Goods  in  Process 


When  finished  goods  are  taken  out  of  the  stock  room  for  sale,  the  Fin- 
ished-Goods Account  is  credited  and  Cost-of-Goods-Sold  Account  is  debited. 

All  three  accounts,  Raw  Materials,  Goods  in  Process,  and  Finished 
Goods,  are  asset  accounts,  that  is,  they  represent  values  owned  by  the 
manufacturing  concern.  The  debit  balance  in  each  account  will  show  the 
inventory  value  for  each  asset. 

We  will  now  take  up  these  three  stages  separately  and  explain  how  each 
account  is  tied  up  with  the  perpetual  inventory  record. 

Assignment  24,  Page  3 


STAGE  1 

Raw  Materials  in  the  Storeroom 

To  know  the  quantity  and  value  of  material  on  hand  at  any  moment, 
two  things  are  necessary. 

1.  A  suitable  room  should  be  provided  in  which  to  store  raw  materials. 

2.  An  accurate  record  should  be  kept  for  all  material  received  and  all 
material  taken  out  and  put  in  process  in  the  factory. 

The  Storeroom — Duties  of  the  Storeskeeper.  The  storeroom  should  be 
conveniently  located  near  the  factory  departments  that  use  the  material. 
When  the  material  is  received,  it  is  placed  in  the  storeroom  to  remain  there 
until  it  is  needed  in  the  factory. 

Careless  and  inadequate  supervision  of  the  storeroom  is  the  cause  of 
serious  leaks  and  losses.  For  this  reason,  the  storeskeeper  should  be  held 
responsible  for  the  material  received  in  the  storeroom.  He  is  also  expected 
to  account  accurately  for  any  withdrawals  of  material  from  the  storeroom. 

Materials  in  the  storeroom  represent  an  investment  of  cash,  and  for 
this  reason  should  be  just  as  carefully  safeguarded  as  cash.  As  you  know, 
a  cashier  is  generally  placed  under  bond  for  the  faithful  performance  of 
his  duties  in  the  disposition  of  funds  intrusted  to  his  care.  In  like  man- 
ner, the  storeskeeper  is  the  custodian  of  the  company's  store  of  materials 
and  should  be  held  accountable  for  its  disposition. 

Since  the  storeskeeper  is  responsible  for  all  materials  received  and  de- 
livered, he  should  first  of  all  provide  a  definite  place  in  the  storeroom  for 
each  kind  of  material. 

For  example,  castings  should  be  given  a  definite  place,  sheet  metal  an- 
other, bolts,  screws,  and  small  parts,  each,  another,  etc.  The  bins  and  even 
the  aisles  may  be  given  numbers.  With  the  proper  classification  of  mate- 
rial, the  storeskeeper  is  able  to  work  out  a  numeral  or  an  alphabetical  code 
for  each  class,  size,  or  grade  of  material. 

Since  material  is  brought  in  and  taken  out  of  the  storeroom  continually, 
the  storeskeeper  maintains  some  kind  of  record  for  each  kind  of  material. 
For  example,  he  may  use  bin  cards,  on  which  a  record  is  made  when  goods 
are  put  in  the  bin  and  when  they  are  taken  out.  These  bin  cards  are  not 
a  part  of  the  accounting  department,  they  merely  serve  as  a  means  of 
keeping  adequate  amounts  of  material  on  hand  and  also  facilitate  the  mak- 
ing of  a  test  in  connection  with  a  physical  inventory. 

The  Stores  Ledger — Duties  of  the  Stores  Ledger  Clerk.  Even  tho  the 
bin  cards  provide  a  record  of  material,  they  do  not  furnish  money  values 
of  material.  They  merely  record  quantities.  Both  quantities  and  money 
values  of  material  are  therefore  recorded  in  a  separate  record  called  the 
"stores  ledger."  This  ledger  contains  an  account  for  each  class  of  material. 

Usually  the  stores  ledger  is  kept  in  the  cost  department  or  in  the  gen- 
eral accounting  department.    In  some  of  the  smaller  concerns,  the  stores 

Assignment  24,  Page  4 


ledger  is  kept  right  in  the  storeroom  and  the  storeskeeper  is  in  charge. 
This  is  not  desirable,  however,  since  the  stores  ledger  is  a  part  of  the  ac- 
counting work.  It  is  better,  therefore,  to  keep  the  ledger  under  direct 
supervision  and  in  connection  with  the  cost  department. 

The  person  in  charge  of  this  ledger  is  called  the  stores  ledger  clerk.  In 
making  his  entries,  he  uses  the  approved  invoices  for  all  materials  received, 
and  the  material  requisitions  for  materials  withdrawn. 

First  of  all,  we  shall  explain,  by  means  of  an  illustration,  how  a  stores 
ledger  is  set  up  and  hov\'  such  a  ledger  operates  as  a  part  of  a  perpetual 
inventory  system. 

Stores  Ledger  Illustrated.  The  Beaver  Manufacturing  Company,  re- 
fered  to  in  Assignment  23,  decided  to  introduce  the  perpetual  inventory 
system  on  Januarv  1,  1922.  On  that  date,  it  had  on  hand  raw  materials 
amounting  to  $20,060.50. 

The  inventory  sheets  on  which  the  material  was  listed  at  the  time  of 
taking  this  inventorj^  showed  four  classes  of  material,  as  tabulated  in 
Figure  1. 


Commodity  Quantity 

A  .                     500 

B  1,200 

C  1,300 

D  1,000 


Prices 

Amount 

$3.5000 

$  4,250.00 

5.2500 

6,300.00 

4.0000 

5,200.00 

4.3105 

4,310.05 

$20,060.50 

Inventories  of  Raw  Material 
Figure  1. — This  table  shows  a  list  of  raw  material  on  hand  January  1,  1922. 

Accordingly,  a  Stores  Ledger  Account  was  provided  for  each  of  these 
classes  of  raw  material,  and  the  quantity,  price,  and  value  on  hand  was 
entered  in  the  Stores  Ledger  Account  on  January  1,  1922,  in  the  "received" 
column.  The  purchases,  during  January,  of  Commodity  A  are  also  shown 
in  the  Stores  Ledger  Account,  illustrated  in  Figure  2. 

The  inventory  for  Commodity  A,  as  you  will  observe,  is  recorded  in  the 
"received"  columns  and  also  in  the  "balance  on  hand"  columns. 

You  will  notice  that  the  difference  between  the  quantities  and  values 
received  and  the  quantities  and  values  issued  represents  the  quantity  and 
value  on  hand  for  each  commodity. 

The  balances  of  the  Stores  Ledger  Accounts  for  Commodities  A,  B,  C, 
and  D,  will  equal  the  amount  on  the  debit  side  of  the  Raw-Materials  Ac- 
count in  the  general  ledger;  namely,  $20,060.50.  The  Raw-Materials  Ac- 
count can  therefore  be  said  to  control  the  four  accounts  in  the  subsidiary 
stores  ledger,  as  illustrated  in  Figure  3. 

After  setting  up  the  Stores  Ledger  Accounts,  the  next  step  consists  in 
recording  new  materials  as  they  are  received,  upon  order  of  the  purchas- 
ing department. 

Assignment  24,  Page  5 


Commod 

ity 

A 

STORES  LEDGER  ACCOUNT 

Account  No.  _ 

Kind                       ^^                                                                 Grade                      ^^                                        TTnit.            ^ 

iece 

Received 

Issued 

Balance  on  Hand 

Date 

'urchaw 

Order 

No. 

Quan- 
tity 

Unit 
Price 

Amount 

Date 

Mafl 
Req. 
No. 

Quantity 

Unit 
Price 

Amount 

Date 

Quantity 

Amount 

.///zx 

INVEN- 
TORY 

500 

8 

50 

4250 

00 

>h|t^ 

1 

200 

8 

50 

1700 

00 

i/i/zz 

1/3/22 

500 
300 

4,250 

00 

//w/zi 

10 

100 

8 

25 

825 

00 

>hHln 

5 

250 

8 

50 

2125 

00 

l/l5/zz 

300 

iMn 

21 

150 

8 

50 

1275 

00 

'Mn 

9 

50 

8 

50 

425 

00 

i/zllu 

250 

if^ln 

31 

50 

8 

00 

400 

00 

iJ2s/n 

12 

100 

8 

25 

825 

00 

Uln. 

200 

VWzi 

13 

50 

8 

25 

425 

00 

ihijix 

150 

1,250 

00 

1 

Stores  ^Ledger  Account 
Figure  2. — This  Stores  Ledger  Account  has  three  divisions:  The  "Received"  division 
is  somewhat  like  the  receipts  side  of  a  cash  book,  only  instead  of  recording  cash,  we 
are  recording  values  of  material;  the  "Issued"  division  may  be  compared  to  the  dis- 
bursements side  of  a  cash  book;  the  "Balance  on  Hand"  division  compares  with  the 
cash  balance.  Commodities  B,  C,  and  D  are  each  given  an  account  in  the  stores  ledger 
similar  to  the  one  shown  for  Commodity  A.  In  some  Stores  Accounts,  another  section 
is  added  at  the  extreme  left  for  goods  ordered,  as  illustrated  in  Assignment  14. 

The  Purchase  Requisition  and  Purchase  Order.  When  the  stores  clerk 
finds  that  certain  kinds  of  material  are  running  below  a  certain  minimum, 
he  sends  a  purchase  requisition  for  a  new  or  repeat  order  to  the  purchasing 
department,  or  to  the  buyer  in  case  no  department  is  maintained. 


General  Ledger 

Raw  Materials 
20,060.50 


Stores  Ledger 
Commodity  A  Commodity  C 


4,250.00 

Commodity  B 


5,200.00 

Commodity  D 


6,300.00 


4,310.50 


Figure  3. — Chart  showing  Agreement  of  Controlling  Account  with  Subsidiary  Ledger. 

The  purchasing  agent,  who  is  usually  the  head  of  the  purchasing  de- 
partment, then  issues  a  purchase  order,  which  specifies  the  quality,  quan- 
tity, price,  time  of  delivery,  and  point  of  destination,  also  the  terms,  and 
in  some  cases  the  transportation  charges.  At  this  point,  refer  to  Assign- 
ment 8,  where  the  purchase  routine  was  fully  explained. 

Entries  in  the  Raw-Materials  Account  for  Materials  Received.  When 
the  material  arrives,  the  receiving  clerk,  or  sometimes  the  storeskeeper 


Assignment  24,  Page  6 


inspects  and  counts  the  goods.  He  makes  out  a  receiving  report,  a  copy  of 
which  goes  to  the  purchasing  department.  In  the  meantime,  the  purchas- 
ing department  has  received  the  invoice  for  the  material  and  has  compared 
it  with  the  purchase  order.  When  the  purchasing  department  receives  the 
receiving  report,  it  checks  the  invoice  with  this  report.  If  any  changes 
are  necessary  on  account  of  underweight  or  short  measure,  and  so  forth, 
the  purchasing  department  indicates  these  changes,  corrects,  and  approves 
the  invoice.  The  approved  invoice  is  now  sent  to  the  general  ledger  book- 
keeper. 

The  bookkeeper  uses  this  approved  invoice  as  the  basis  for  his  entries. 
If  he  has  a  purchase  book,  he  enters  the  amount  in  the  purchase  book ;  if 
he  has  a  voucher  system,  he  enters  the  amount  in  the  voucher  register 
(assuming  that  a  voucher  is  properly  made  out).  In  some  cases  he  holds 
it  to  be  vouchered  with  the  invoices  at  the  end  of  the  month.  If  the 
voucher  system  is  used,  he  will  make  a  debit  entry  in  the  Raw-Materials 
Account  column,  and  a  credit  entry  in  the  Vouchers  Payable  Account 
column. 

He  follows  the  same  procedure  for  each  invoice  as  it  comes  from  the 
purchasing  department.  Then  at  the  end  of  the  period,  when  the  voucher 
register  is  posted,  the  column  for  raw  materials  will  contain  all  purchases 
of  raw  material  for  the  month.  The  column  is  then  added  and  the  total 
is  posted  as  a  debit  to  the  Raw-Materials  Account.  The  corresponding 
credit  will  be  in  the  total  credited  to  the  Vouchers  Payable  Account. 

These  entries  will  affect  the  general  ledger  in  the  same  way  as  if  each 
purchase  of  material  had  been  debited  to  the  Raw-Materials  Account, 
separately,  and  credited  to  the  account  of  the  creditor  concerned,  as  shown 
by  the  following  journal  entry. 


Dr.  Raw  Materials , 

Cr.  Cash,  Vouchers  Payable,  or  Accounts  Payable 


How  Materials  Received  Are  Recorded  in  the  Stores  Ledger.     After 
making  the  entries  in  the  general  ledger,  the  general  ledger  bookkeeper 


Date 
Received 

From  Whom  Purchased 

On  Purchase 
Order  No. 

Quan- 
tity 

Com- 
modity 

Price 
Each 

'Jan.  10 
{Jan.  10 
Jan.   15 
Jan.   15 
Jan.  24 
Jan.   24 
Jan.  28 
Jan.  28 
Jan.  28 

Davis  Mfg.   Co 

Brown  &  Smith      

Davis  Mfg.    Co 

Collins  Steel  Co 

H.  W.  Jackson  &  Co 

Hoover  Mfg.   Co 

Davis  Mfg.   Co 

Brown  &  Smith     

Hoover  Mfg.   Co 

10 
11 

21 
22 
28 
29 
31 
30 
32 

100 
200 
150 
250 
200 
325 
50 
300 
100 

A 
B 
A 
C 
C 
D 
A 
B 
D 

$8.25 
5.25 
8.50 
4.00 
5.00 
4.00 
8.00 
5.00 
4.35 

List  of  Raw  Materials  Purchased 

Figure   4. — Note   how   the   three    purchases    and    the    receipt    of    Commodity    A    are 
recorded  in  the  Stores  Ledger  Account  of  Figure  2. 


Assignment  24,  Page  7 


sends  the  approved  invoices  to  the  stores  ledger  clerk.  The  stores  ledger 
clerk  now  uses  these  invoices  as  the  basis  for  his  entries  in  the  Stores 
Ledger  Accounts.  For  example,  when  the  approved  invoice  for  Commod- 
ity A  is  received,  the  stores  ledger  clerk  will  record  in  the  "received"  sec- 
tion of  the  Stores  Ledger  Account  for  Commodity  A,  the  date  on  which 
the  material  was  received,  the  purchase  order  number,  the  quantity,  the 
unit  price,  and  the  amount. 

This  is  the  method  that  was  used  by  the  stores  ledger  clerk  of  the 
Beaver  Manufacturing  Company  in  recording  the  raw  material  received 
during  the  month  of  January,  as  listed  in  Figure  4. 


STAGE  2 

Goods  in  Process 

Now  take  the  second  stage.  As  soon  as  materials  are  removed  from 
the  storeroom  and  put  in  process  in  the  factory,  they  are  spoken  of  as 
"goods  in  process."  This  process  of  manufacture  involves  the  three  ele- 
ments, described  in  Assignment  23,  materials,  labor,  and  manufacturing 
expense. 

These  elements  are  recorded  in  the  detail  records  of  the  cost  depart- 
ment, summaries  are  made,  and  totals  are  entered  in  the  Goods-in-Process 
Account,  in  the  general  ledger.  This  account  controls  the  various  accounts 
in  the  cost  ledger. 

Purpose  of  Material  Requisition.  The  issuance  of  material  is  a  matter 
of  importance.  No  material  should  ever  be  given  out  by  the  storeskeeper 
unless  a  requisition  has  been  made  out  for  it  and  signed  by  the  person 
authorized  to  do  so. 

The  material  requisition  operates  like  a  bank  check  altho  unlike  it  in 
appearance.  Cash  is  deposited  in  a  bank.  Cash  in  the  form  of  materials 
is  deposited  in  a  storeroom.  Both  represent  values.  When  cash  is  dra\vn 
out  of  the  bank,  a  check  is  issued  ordering  the  bank  to  pay  the  bearer  or 
order  a  certain  sum  of  money.  The  material  requisition  has  much  the 
same  effect.  It  is  issued  in  the  factory,  ordering  the  storeskeeper  to  deliver 
to  a  certain  department  a  stated  quantity  of  a  specific  material  to  be  used 
for  a  definite  job  or  process. 

Material  requisition  forms  vary  in  size,  shape,  and  rulings,  depending 
upon  the  information  required.  The  form  given  in  Figure  5  is  typical  of 
information  generally  shown  on  the  material  requisition. 

These  requisitions  are  important  because  they  are  the  basis  for  entries 
in  the  accounting  records,  as  explained  in  the  next  paragraph. 

Entries  Made  From  Material  Requisitions.  Material  requisitions  are 
used  in  making  entries  on  the  bin  cards  of  the  storeroom,  in  the  stores 
ledger,  the  production  orders  of  the  cost  department,  and  in  the  general 
accounting  department.  To  understand  how  this  is  done,  trace  the  various 
steps  thru  which  the  requisition  passes,  from  the  time  it  is  issued  until 
it  reaches  the  general  accounting  records. 

Assignment  24,  Page  8 


1.  In  the  Factory.  The  requisition  is  filled  out  in  duplicate  by  the 
foreman  who  needs  the  material.  The  original  requisition  is  sent 
to  the  storeroom  and  the  duplicate  is  retained  as  a  follow-up,  in 
case  the  material  is  not  delivered. 

2.  In  the  Storeroom.  When  the  storeskeeper  delivers  the  materials 
called  for  by  the  requistion,  he  records  the  date,  requisition  number, 
and  quantity  on  his  bin  card.  He  then  sends  the  requisition  to  the 
cost  accounting  department. 

3.  In  the  Factory.  When  the  material  is  received  by  the  foreman  in 
the  factory,  he  checks  it  with  his  duplicate  copy  of  the  requisition, 
which  is  then  forwarded  to  the  cost  department. 

4.  In  the  Cost  Department.  Both  the  original  and  duplicate  of  the 
requisition  are  now  in  the  hands  of  the  cost  department.  Here  the 
two  copies  are  checked  against  each  other  and  verified.  Each  requi- 
sition is  charged  to  the  proper  production  order  on  the  cost  sheet, 
as  explained  later.  Usually  the  stores  ledger  is  kept  in  the  cost 
department.  The  stores  ledger  clerk  will  enter  each  material  requi- 
sition in  the  "issued"  section  of  the  Stores  Ledger  Account,  record- 


To  Storekeeper: 


MATERIAL  REQUISITION 


Please  deliver  to  Department  No. 


No. L 


Date_iiL_3  IQ     22 

5     Assembling 


the   materials  specified   below  for   Production     Order  No. 


10 


Quantity 


Description 


Unit 
Price 


Amount 


200 


Commodity  A 


50 


1,700  00 


Received  the  above 
materials.      Date      '^1^!'^'^ 
E.   S.  Jones 


Filled  by 


H.    C.   M. 


Storeskeeper 


Debits 


Order 
No. 


10 


Amount 


1700 


00 


Credits 


Stores 
Acc't 


Amount 


1700 


00 


Authorized  bj-^: 

E.   S.  Jones 


Foreman 


The  Material  Requisition 

Figure  5. — The  foreman   of  Assembling  Department   5,   orders   the   storeskeeper  to 

deliver  to  him  200  articles  of  Commodity  A.     Note  that  the  requisition  is  properly 

receipted  when  the  goods  are  delivered.    The  stores  ledger  clerk  records  the  delivery  of 

the  material  in  the  Stores  Ledger  Account,  as  shown  in  Figure  2. 


Assignment  24,  Page  9 


ing  the  date,  material  requisition  number,  quantity,  unit  price,  and 
total  amount.  At  the  end  of  the  week  or  month  a  summary  is  made 
of  all  requisitions  for  the  period.  This  total  represents  all  material 
put  into  process. 

5.  In  the  General  Accounting  Department.  The  cost  department  then 
sends  this  total  summary  to  the  general  accounting  department, 
where  the  following  journal  entry  is  made  in  the  controlling  ac- 
counts : 

Dr.  Goods  in  Process 

Cr.  Raw  Materials   

After  this  entry  has  been  posted,  the  Raw-Materials  Account  balance 
will  give  the  inventory  value  of  materials  on  hand.  This  amount  ;  should 
agree  with  the  sum  of  all  debit  balances  in  the  stores  ledger. 

Leaving  the  charges  to  cost  accounts  to  be  discussed  later,  we  may  now 
consider  the  stores  accounts. 

The  factory  departments  of  the  Beaver  Manufacturing  Company  requi- 
sitioned materials  from  stores  during  the  month  of  January,  1922,  to  be 
charged  to  production  orders,  as  listed  in  Figure  6. 


Date 

Req.  No. 

To  Be  Used  on 
Prodttction  Order  No. 

Quantity 

Commodity 

Cost 

Jan.     3 

1 

10 

200 

A 

$  1,700.00 

'       5 

2 

12 

200 

B 

1,050.00 

'       6 

3 

10 

400 

C 

1,600.00 

•     12 

4 

10 

280 

B 

1,470.00 

■     14 

5 

12 

250 

A 

2,125.00 

•     16 

6 

10 

500 

D 

2,155.25 

'     18 

7 

10 

300 

C 

1,200.00 

•     21 

8 

11 

220 

B 

1,155.00 

'     24 

9 

11 

50 

A 

425.00 

•     26 

10 

10 

300 

B 

1,575.00 

•     26 

11 

11 

500 

D 

2,155.25 

'     28 

12 

11 

100 

A 

825.00 

'     30 

13 

13 

50 

A 
TOTAL 

425.00 

$17,860.50 

List  of  Material  Rejquisitioned 

Figure  6. — Requisition  No.  1  was  illustrated  in  the  material  requisition  form,  Figure  5, 
page  9. .  Trace  the  postings  from  this  requisition  to  the  Stores  Ledger  Account  for 
Commodity  A  in  Figure  2,  and  note  that  this  account  is  credited  in  the  "Issued"  columns 
with  the  quantities  and  values  of  material  delivered  out  of  the  storeroom  to  the 
factory,  as  shown  by  the  material  requisition.  In  like  manner,  all  other  Stores 
Accounts  are  credited  with  material  issued. 

The  Stores  Ledger  Accounts — A  Perpetual  Inventory  of  Materials.    If 

a  proper  record  is  maintained  of  the  receipts  and  issues  of  each  class  of 
material,  you  can  readily  see  that  a  perpetual  inventory  is  obtained  because 
the  stores  ledger  clerk  can  determine  from  his  ledger  every  day,  week, 
or  month  just  how  much  of  any  class  of  material  is  on  hand  and  the  value 


Assignment  24,  Page  10 


of  it.     For  example,  for  Commodity  A  you  will  observe  there  were  on 
hand: 

300  on  January  3 
300  on  January  16 
250  on  January  24 
200  on  January  28 
150  on  January  31 

Altho  the  value  is  usually  not  ascertained  until  the  end  of  the  month, 
it  could  be  ascertained  at  any  time  by  subtracting  the  total  amount  of 
issues  from  the  total  amount  of  receipts. 

At  the  end  of  the  month,  it  is  desirable  to  balance  the  Stores  Ledger 
Accounts  with  the  balance  in  the  Raw  Material  Controlling  Account  in  the 
general  ledger.  By  taking  off  a  statement  of  balances  of  the  stores  ledger, 
we  find  that  the  aggregate  balances  of  the  Stores  Accounts  will  agree  with 
the  debit  balance  in  the  Raw-Material  Controlling  Account. 

Purpose  of  the  Cost  Ledger.  Just  as  the  Stores  Ledger  Accounts  fur- 
nish a  perpetual  inventory  record  of  materials,  controlled  by  the  Raw  Ma- 
terial Account,  so  the  cost  ledger,  with  its  numerous  accounts  for  produc- 
tion orders,  provides  a  perpetual  inventory  of  goods  in  process,  controlled 
by  the  Goods  in  Process  Account  in  the  general  ledger. 

Cost  Sheet  for  Each  Production  Order.  A  cost  sheet  is  opened  up  in 
the  cost  department  for  each  production  order  issued.  This  order  is  issued 
by  the  manager  or  some  other  administrative  official,  instructing  the  fac- 
tory to  make  a  certain  quantity  of  a  given  commodity.  Such  orders  may 
be  issued  to  fill  a  particular  sales  order,  or  they  may  call  for  a  certain 
quantity  of  a  particular  commodity  to  be  made  and  sent  finished  to  the 
stock  room.  When  the  production  order  is  issued,  the  factory  depart- 
ments that  are  to  do  the  work  will  receive  a  copy.  A  copy  of  the  produc- 
tion order  also  goes  to  the  cost  accountant  who  immediately  opens  up  a 
cost  sheet  or  a  Cost  Account  in  his  cost  ledger  with  that  production  order 
number. 

What  Is  Entered  on  the  Cost  Sheet.  All  material  and  labor  expended 
on  the  job  is  charged  on  the  cost  sheet  for  each  production  order.  The 
cost  sheet  illustrated  in  Figure  7  will  show  you  how  the  transactions  were 
recorded  for  Production  Order  No.  10. 

Material  in  Process  Recorded  on  the  Cost  Sheet.  It  has  already  been 
emphasized  that  when  a  Stores  Account  is  credited  with  material  taken  out 
of  the  storeroom,  some  cost  account  must  be  charged  in  the  cost  depart- 
ment. 

The  cost  accountant  of  the  Beaver  Manufacturing  Company  recorded 
these  material  charges  on  loose-leaf  sheets  in  the  cost  ledger,  as  illustrated 
in  Figure  7. 

Direct  Labor  in  Process  Recorded  on  the  Cost  Sheet.  After  material  is 
put  into  process  of  manufacture,  labor  is  expended  on  it.    It  is  necessary, 

Assignment  24,  Page  11 


•       ComiD 

COS1 

' SHEET 

Prod 

.C 

)rdp 

r  N 

n       10 

Cost  o 

odity  X 

Quantity  on  Ordei 

1,200 

For       Fi"i 

shed  Storerooc 

Dat 

P        Jan 

.   3,   1922 

MATERIAL  USED 

Date 

Req. 
No. 

Material  A 

Material  B 

Material  C 

Material  D 

Quan. 

Cost 

Quan. 

Cost 

Quan. 

Cost 

Quan 

Cost 

1/  3/22 

I 

200 

1,700 

00 

1/  6/22 

3 

400 

1,600  00 

1/12/22 

4 

280 

1,470 

00 

1/15/22 

6 

500 

2,155 

25 

1/18/22 

7 

300 

1,200  00 

1/26/22 

10 

300 

1,575 

00 

Total 

200 

1,700 

00 

580 

3,045 

00 

700. 

2,800  00 

500 

2,155 

25 

Unit  Cost 

8 

50 

5 

25 

i 

1  00 

4 

31 

DIRECT-LABOR  COST 

Week  ending 

Hours 

Cost 

Week  ending 

Hours 

Co.st 

Jan.     7,   1922' 

3,500 

2,450 

"       14,     " 

3,000 

2,100 

00 

••      21,     " 

2,300 

1,660 

00 

"       28,     •• 

1,808 

1,119 

10 

Total 

10,608 

7,329 

10 

OVERHEAD  EXPENSE                       ^ 

ite 
Ho 

Date 

Hours 

per 

ur 

Amount 

1/28/22 

10,608 

25 

2,652 

00 

Total 

2,652 

00 

COST  SUMMARY 

TT_ 

Completed 
Quantity  made 

Jan.   28,   1922 

Material 

Total   Cost 

Cos 

t 

9,700 

25 

8 

08 

Direct  Labor 

7,329 

10 

6 

11 

1,200 

- 

Overhead 

2,652 

00 

2 

21 

Total  Factory  Cost 

19,631 

35 

16 

40 

The  Cost  Sheet 
Figure  7. — Trace  all  material  used  in  Production  Order  No.  10  back  to  the  list  of 
material  requisitions  in  FigTare  6.  The  entries  for  direct-labor  charges  and  overhead 
are  explained  in  the  next  paragraph.  Evidently  Production  Order  No.  10  was  completed 
on  January  28,  since  at  that  time  all  the  manufacturing  costs  and  expenses  are  sum- 
marized on  the  cost  sheet.  Refer  to  this  cost  sheet  as  you  continue  with  the  discussion. 
Assignment  24,  Page  12 


therefore,  that  each  workman  make  out  a  daily  report  to  show  the  time 
spent  by  him  on  each  production  order.  These  reports  go  to  the  cost  de- 
partment where  they  are  summarized,  by  production  orders,  as  shown  in 
the  second  section  of  the  cost  sheet. 

For  example,  John  Davis  reported  his  time  in  the  factory  for  January 
4,  1922,  on  a  daily  labor  report  as  illustrated  in  Figure  8. 


Department 
Namft 

DAILY  LABOR  REPORT 

No.         10 

A-Machining                                                       j^^^^       Jan.   4              iq 
John  Davis 

22 

Occupation 

RiEer 

Machine  Nc 

247 

Order 
No. 

Description  of  Work 

Time 
Started 

Time 
Stopped 

Elapsed 

Time 

Amount 

10 

Reaming  A  1201 

8;00  A.M. 

12:00  A.M. 

4  hrs. 

2 

40 

11 

#     308 

1:00  P.M. 

3:00  P.M. 

2     " 

1 

20 

12 

A  1206 

3:00  P.M. 

5:00  P.M. 

2     " 

1 

20 

Total 

8  hrs. 

4 

80 

rplmilatPrl     hy                     E.    J. 

Pn.sipid  ir,  Cost  Shppts  hv                           ^.    h. 

Wage  rate 
Approved  bv 

$  60  per  hr. 
S.   Smith 

Foreman 

Labor  Report' 

Figure  8. — This  report  contains  information  which  is  finally  brought  into  the  account- 
ing records.    Observe  especially  what  elapsed  time  means. 

These  daily  reports  are  numbered  consecutively.  The  time  that  the 
workman  starts  and  stops  work  on  a  job  is  recorded  on  the  labor  report  by 
the  workman  or  the  foreman.  The  total  time  spent  on  a  job  is  called 
elapsed  time.  The  time  reports  of  all  productive  workmen  are  collected 
daily,  usually  by  the  timekeeper,  who  is  in  charge  of  the  pay  roll.  The 
timekeeper  will  check  these  time  reports  with  the  time  clock  cards  and 
make  any  necessary  corrections  or  changes.  At  the  close  of  the  day,  he 
sends  all  the  time  reports  to  the  cost  department. 

The  cost  department  will  now  charge  the  labor  to  each  job  on  the  cost 
sheet  provided,  making  the  proper  distribution  between  direct  and  indirect 
labor.  The  indirect  labor  is  included  under  overhead,  as  shown  in  the  cost 
sheet. 

You  will  note  the  entries  for  direct  labor  on  the  cost  sheet  for  Produc- 
tion Order  No.  10.  The  accountant  made  these  entries  on  the  cost  sheet 
at  the  close  of  each  week,  instead  of  daily,  since  that  seemed  to  be  a  more 
convenient  plan. 


Assignment  24,  Page  13 


These  time  reports  are  then  filed  in  the  cost  department  for  future  ref- 
erence. In  some  concerns,  they  are  not  sent  to  the  cost  department,  but 
are  retained  by  the  timekeeper,  in  which  case  he  sends  only  a  summary  to 
the  cost  department. 

In  any  case,  the  cost  department  verifies  the  final  pay  roll  for  the  gen- 
eral accounting  department.  In  doing  this,  it  uses  the  clock  cards  or  the 
time  reports.  This  pay  roll  is  sent  to  the  general  bookkeeper,  who  enters  it 
in  the  pay-roll  voucher  and  then  in  the  voucher  register  as  a  debit  in  the 
Goods-in-Process  Account  column  and  a  credit  in  the  Vouchers  Payable 
Account  column. 

The  indirect-labor  charge  is  also  entered  in  the  voucher  register,  as  ex- 
plained later  in  the  assignment. 

Pay  Roll — For  Direct  and  Indirect  Labor.  The  labor  reports  just  de- 
scribed are  the  means  of  getting  direct  labor  charged  to  the  proper  Cost 
Accounts.    It  is  necessary,  therefore,  to  have  some  record  of  the  total  time 


PAY  ROLL 

Week  Ending      Jan.    7       192  2 

Name 

No. 

MON. 

TUES. 

w 

ED. 

Thurs. 

Fri. 

Sat. 

Total 
Hours 

Rate 

Total 
Pay 

R()LL> 

.\dvance 

1 

Net 
Amount 

Basset  E. 

10 

8 

9 

1 

8 

10 

1 

4 

7 

1 

2 

4 

a 

4 

48 

60 

28 

80 

10 

00 

$    18 

80 

Brown  C. 

11 

8 

8 

8 

1 

■  2 

8 

8 

4 

3 
4 

45 

i 

50 

22 

63 

22 

63 

Cowles  John 

12 

8 

9 

X 

8 

10 

1 

4 

7 

^ 

4 

i 

48 

55 

24 

20 

24 

20 

DanielsChas. 

13 

8 

8 

3 

10 

i 
A, 

8 

4 

3 
'4 

42 

60 

25 

20 

16 

00 

9 

20 

Davis  John 

14 

8 

9 

2 

8 

10 

1 
4 

7 

a. 

2 

4 

3 
4 

48 

50 

28 

00 

28 

00 

Edwards  J. 

15 

•8 

8 

8 

8 

8 

4 

3 
4 

44 

3 
i 

42 

18 

20 

18 

20 

Fall  A 

16 

8 

8 

8 

8 

8 

4 

3 
4 

44 

3 
4 

48 

21 

48 

15 

00 

6 

48 

Fay  John 

17 

8 

1 

6 

3 

8 

4 

30 

40 

12 

00 

12 

00 

^ 

— 

i — ^ 

"^ 

— -^ 

"■■■ — ■ 

^■^ — '' 

^ 



' 

— 

r-^' 

""* 

Total 

775 

795 

765 

820 

810 

535 

4,500 

j 

L..         i 

)050  00 

390  00 

$4660  00 

The  Pay  Roll 

Figure  9. — This  pay  roll,  as  you  will  note,  does  not  give  all  the  names  of  the  employes. 
The  totals  given  at  the  bottom  therefore  include  the  amounts  and  figures  omitted.    As 
you  continue  with  the  discussion,  you  will  see  how  the  total  pay  roll  is  distributed 
between  direct  and  indirect  labor. 


Assignment  24,  Page  14 


of  employes.  Generally,  the  workmen  are  given  clock  numbers,  and  they 
are  required  to  punch  the  time  on  a  clock  card  when  they  come  in  and  when 
they  leave  the  factory.  These  clock  cards  are  used  in  verifying  the  pay 
roll,  a  form  of  which  is  illustrated  in  Figure  9.  Workmen  engaged  in  in- 
direct labor  do  not,  as  a  rule,  make  out  daily  reports  in  the  same  manner 
as  productive  workmen,  altho  their  time  is  also  recorded  on  the  pay  roll. 
At  the  end  of  each  pay  period,  the  pay-roll  distribution,  part  to  direct  labor 
and  part  to  indirect  labor,  should  agree  with  the  total  pay  roll.  If  any 
advances  are  made  to  employes,  they  are  deducted  from  the  workmen's  pay. 

The  pay-roll  distribution  for  the  week  ending  January  7,  1922,  was 
as  follows : 

Direct  Labor  Charged  to  Production  Orders  thru  Daily  Labor  Reports   $4,700.00 
Indirect  Labor  350.00 

$5,050.00 

This  pay-roll  distribution  would  then  be  attached  to  the  pay-roll  voucher 
♦i^hich  would  be  recorded  in  the  voucher  register  as  follows: 

Debit  Columns: 

Goods  in  Process  $4,700.00 

Indirect  Labor  350.00 

Credit  Columns: 

Vouchers  Payable  $5,050.00 

A  voucher  check  for  the  net  amount  of  the  pay  roll,  $4,660.00,  would 
be  issued.  The  advances  would  be  debited  to  Vouchers  Payable  when 
they  were  made. 

The  pay  rolls  of  January  14,  January  21,  and  January  28  would  be 
treated  in  a  similar  manner.  The  amount  accrued  on  January  31  would  be 
recorded  in  the  voucher  register,  but  would  not  be  paid  until  the  first  pay 
day  in  February.  This  method  of  handling  accrued  wages  was  explained 
in  Assignment  22. 

How  Overhead  Expenses  Are  Charged  to  Manufacturing  Cost  on  the 
Cost  Sheet.  The  next  element  of  expense  to  be  charged  to  production 
orders  is  the  factory  overhead.  This  is  also  included  on  the  cost  sheet 
under  overhead,  as  given  in  Figure  7.  You  have  already  learned  in  Assign- 
ment 23  what  items  are  included  under  manufacturing  expenses  or  over- 
head, for  example,  janitors'  wages,  superintendents'  salaries,  repairs,  de- 
preciation, etc. 

Overhead  Distributed  According  to  Direct-Labor  Hours.  There  are 
various  ways  of  distributing  this  overhead  to  the  various  production  or- 
ders; for  example,  on  the  basis  of  direct-labor  costs,  on  the  basis  of  ma- 
chine hours,  or  on  the  direct-labor  hours.  All  these  methods  will  be 
explained  in  detail  in  the  section  on  Cost  Accounting  Procedure. 

Since  the  last  mentioned  method  of  distributing  overhead  expense  on 
the  basis  of  direct-labor  hours  is  the  simplest,  we  shall  explain  it  here. 

The  total  manufacturing  expense  of  the  Beaver  Manufacturing  Com- 
pany, for  the  month  of  January,  1922,  which  was  charged  to  various  manu- 

Assignment  24,  Pa^e  15 


facturing  accounts  in  the  general  ledger,  amounted  to  $3,900.00,  as  shown 
below. 

Factory  Supplies  $  335.00 

Indirect  Labor  2,185.00 

Heat  and  Power 331.00 

Repairs  to  Machinery  and  Tools 238.00 

Depreciation  of  Building,  Machinery,  and  Tools  598.00 

Insurance  115.00 

Taxes  40.00 

Miscellaneous  Factory  Expenses  58.00 

$3,900.00 

The  number  of  direct-labor  hours  which  were  spent  on  the  various 
production  orders  during  January  were  as  follows: 

Order  Direct-Labor 

number  Hours 

10 10,608 

11 1,872 

12 2,808 

13 312 

Total  15,600 

Since  the  total  overhead,  $3,900.00,  is  to  be  distributed  to  these  four 
production  orders  according  to  the  number  of  direct-labor  hours  spent  on 
each  order,  we  must  first  determine  the  rate  per  direct-labor  hour.  This 
is  done  by  dividing  the  total  overhead  by  the  direct-labor  hours  for  the 
month,  15,600. 

$3,900.00  ~  15,600  =  $0.25  per  direct-labor  hour. 

In  order  to  determine  the  amount  of  overhead  for  Production  Order  No.  10, 
we  will  multiply  the  number  of  direct-labor  hours  spent  on  Production 
Order  No.  10,  namely,  10,608  by  $0.25,  which  amounts  to  $2,652.00.  This 
is  the  amount  you  will  find  for  overhead  on  the  cost  sheet  for  Prdouction 
Order  No.  10,  in  Figure  7. 

The  overhead  to  be  distributed  to  the  other  three  production  orders, 
11,  12,  and  13,  is  determined  in  the  same  way  as  in  the  case  of  Production 
Order  No.  10.  That  is,  the  number  of  direct-labor  hours  spent  on  each 
order  is  multiplied  by  the  hour  rate,  $0.25,  as  shown  in  the  following 
schedule : 

Order  No.  Direct-Labor         Overhead  Rate         Overhead 

Hours  per  Hour  Expense 

10  10,608  $  .25  $2,652.00 

11  1,872  .25  468.00 

12  2,808  .25  702.00 

13  312  .25  78.00 

Total  15,600  $3,900,00 

This  total  overhead  expense,  $3,900.00,  has  been  charged  to  the  pro- 
duction orders  on  which  work  has  been  done,  and  therefore  must  also  be 
used  for  an  entry  in  the  general  journal  as  follows: 

Debit:     Goods  in  Process    $3,900.00 

Credit:     Manufacturing  Expense     $3,900.00 

Assignment  24,  Page  16 


How  the  Unit  Cost  Is  Determined  from  Cost  Sheets.  In  the  cost  sheet 
illustrated  for  Production  Order  No.  10,  in  Figure  7,  you  will  observe  that 
the  three  elements  of  factory  cost  have  now  been  properly  charged; 
namely : 

Direct  Material 
Direct  Labor 
Overhead 

The  job  was  completed  on  January  28.  At  the  end  of  the  month,  the 
cost  accountant  fills  out  the  summary  at  the  bottom  of  the  sheet  for  the 
various  cost  elements  and  ascertains  the  unit  cost  to  be  $16.40.  The  fin- 
ished product  is  transferred  to  the  stock  room  to  be  left  there  until  a 
shipping  order  instructs  the  shipping  clerk  to  ship  the  commodity  to  the 
customer. 

The  cost  sheet  is  taken  out  of  the  cost  ledger  and  transferred  to  a  ledger 
for  completed  work.  If  there  are  many  classes  of  commodities  manufac- 
tured, it  is  desirable  to  have  stock  records  on  which  the  quantity  and 
value  of  each  commodity  received  and  shipped  out  of  the  stock  room  are 
recorded  in  the  same  manner  as  that  described  for  stores  records.  The 
controlling  account  for  the  stock  records  is  commonly  designated  "Finished 
Goods." 

How  Cost  Ledger  Is  Controlled  by  Goods-in-Process  Account.  You  have 
learned  how  the  Raw-Material  Account  controls  the  stores  ledger.  It  is 
just  as  important  that  the  cost  ledger  should  be  controlled  by  the  Goods- 
in-Process  Account  in  the  general  ledger.  The  following  outline  shows 
how  the  cost  ledger  is  related  to  Goods-in-Process  Controlling  Account. 

1.  The  inventory  of  material  in  process,  December  31,  1921,  is  debited 
in  total  to  Goods-in-Process  Account  and  in  detail  to  the  cost  ac- 
counts. 

Material  requisitions  are  recorded  in  detail  on  the  cost  accounts 
but  in  total  from  the  summary  of  requisitions  to  the  controlling 
account. 

2.  The  inventory  of  labor  in  process,  December  31,  1921,  is  debited  in 
total  to  the  Goods-in-Process  Account,  and  in  detail  to  the  cost 
accounts. 

The  daily  labor  reports  for  direct  labor  are  recorded  in  the  cost 
accounts,  but  are  summarized  and  charged  in  total  to  Goods-in- 
Process  Account. 

3.  A  determined  rate  of  overhead  cost  per  hour  is  used.  This  rate  is 
multiplied  by  the  number  of  direct-labor  hours  expended  on  each 
production  order  during  the  month,  and  the  amount  is  charged  to 
the  cost  accounts.  A  summary  of  all  such  charges  is  debited  to 
Goods-in-Process  Account  and  credited  to  the  Manufacturing  Ac- 
count. ; 

4.  When  a  production  order  is  finished,  the  cost  sheet  representing  the 
factory  cost  is  transferred  from  the  cost  ledger.    The  finished  prod- 
Assignment  24,  Page  17 


uct  is  charged  to  Stock  Accounts  at  the  unit  factory  cost.  A  sum- 
mary of  all  orders  finished  during  the  month  is  the  basis  of  an  entry 
debiting  Finished-Goods  Account  and  crediting  Goods  in  Process. 

5.  The  difference  between  the  gross  debits  and  the  gross  credits  in  the 
Goods-in-Process  Controlling  Account  represents  the  inventory  of 
goods  in  process  at  the  end  of  the  month.  A  list  of  all  the  charges 
for  material,  labor,  and  overhead  on  the  cost  sheets  of  orders  un- 
completed at  the  end  of  the  month  should  total  up  to  the  amount  of 
the  balance  in  the  Goods-in-Process  Controlling  Account. 

Thus,  we  have  a  perpetual  inventory  of  the  cost  accounts  which 
are  under  control. 

STAGE  3 

Finished  Goods  in  the  Stock  Room 

When  the  product  is  finished  so  that  it  is  ready  for  sale,  it  passes  from 
the  Goods-in-Process  stage  to  the  Finished-Goods  stage.  »Since  the  cost 
of  each  unit  is  known,  finished  stock  records  may  be  kept  in  the  same 
manner  as  described  for  stores  accounts.  The  Finished-Goods  Account 
in  the  general  ledger  is  debited  with  the  factory  cost  of  goods  manufac- 
tured. When  the  goods  are  shipped  out  to  customers,  the  factory  cost  of 
those  goods  may  be  ascertained.  An  entry  may  then  be  made  at  the  end 
of  each  month  debiting  Cost-of-Goods-Sold  Account,  and  crediting  Finished 
Goods  with  the  cost  of  shipments. 

Method  of  Figuring  Cost  in  Process  Manufacturing.  Thruout  this  as- 
signment we  have  shown  how  the  cost  of  production  is  determined  by 
means  of  production  orders ;  in  certain  industries,  however,  the  production 
order  method  is  not  in  use.  This  is  due  to  the  fact  that  the  process  of 
manufacturing  is  continuous  and  not  according  to  specific  orders.  For 
example,  in  the  manufacturing  of  soap,  paper,  cement,  etc.,  the  same  ma- 
terial must  pass  continuously  thru  various  processes  and  operations  in 
such  a  way  that  it  is  impossible  to  determine  where  one  lot  ends  and  the 
next  begins.  In  such  cases,  therefore,  we  must  determine  the  unit  cost 
of  each  process.  This  is  found  by  dividing  the  total  cost  of  each  process 
by  the  number  of  units  produced  during  a  certain  period.  Then,  the  total 
manufacturing  cost  of  each  unit  is  the  sum  of  the  unit  cost  of  each 
process. 

More  will  be  said  about  this  method  of  cost  determination  in  the  sec- 
tion on  cost  accounting  procedure. 

Summary  of  Accounts  in  the  Beaver  Manufacturing  Company.  To  sum- 
marize the  situation  of  the  Beaver  Manufacturing  Company  after  a  per- 
petual inventory  of  the  three  stages  of  production  had  been  in  use  for 
one  month,  we  need  only  to  know  the  factory  cost  of  goods  sold  and 
shipped  to  customers.  The  cost  of  finished  goods  on  hand  on  January  1, 
1922,  amounted  to  $33,500,00,  and  the  factory  cost  of  goods  manufactured 
during  the  month  amounted  to  $34,112.60.  It  was  found  that  the  sales 
for  the  month  amounted  to  $40,600.00,  the  cost  of  which  was  $30,450.00. 
The  general  ledger  accounts  would  appear  as  follows : 

Assignment  24,  Page  18 


RAW  MATERIAL 


1922 
Jan.  1  Inventory 


31  Purchases  during  the 
month  of  January  . 


$20,060.50 
8,785.00 

$28,845.50 


Feb.  1  Balance 


1922 
Jan.  31 


Material  issued  to  fac- 
tory during  the  month 
and  charged  to  produc- 
tion orders  $17,860.50 


Jan.  31  Balance  on  hand 


10,985.00 
$28,845.50 


$10,985.00 

GOODS  IN  PROCESS 


1922 
Jan.  1  Inventory 


1922 
$14,940.00   Jan.  31 


"  31  Material  issued  from 

storeroom  and  charged 
to  production  orders  . 

Jan.  31  Direct  Labor  charged  to 
production  orders  thru 
daily  labor  reports 

Jan.  31  Overhead  expenses  .  .  . 


Feb.  1  Balance 


17,860.50 

11,494.00 

3,900.00 

$48,194.50 

$14,081.90 


Factory  cost  of  produc- 
tion orders  finished 
and  delivered  to  the 
stock-room  $34,112.60 


Jan.  31  Balance  in  process 


14,081.90 


$48,194.50 


FINISHED  GOODS 


1922 

Jan.  1  Inventory  $33,500.00 

"  31  Factory  cost  of  goods 

finished  $34,112.60 


$67,612.60 


1922 

Jan.  31  Cost  of  goods  shipped 
to  customers  .  .  . 

Jan.  31  Balance  on  hand  ,  .  . 


balance  $37,162.60 

COST  OF  GOODS  SOLD 


$30,450.00 

37,162.60 

$67,612.60 


1922 
Jan.  31  Cost  of  finished  goods 

shipped  to  customers  .  $30,450.00 


1922 
Jan.  31  Transferred  to  Trading  $30,450.00 


SALES 


1922 
Jan.  31  Transferred  to  Trading  .  $40,600.00 


1922 
Jan.  31  Sales  for  January 


$40,600.00 


The  balances  of  the  Cost  of  Goods  Sold  and  Sales  Accounts  are  now 
closed  into  the  Trading  Account.  It  should  be  understood,  of  course,  that 
all  the  transfer  entries  referred  to  above  should  be  made  by  journal 
entries,  as  was  fully  discussed  in  Assignment  6. 


Assignment  24,  Page  19 


TRADING  ACCOUNT 


1922 

Jan.  31  Cost  of  Sales $30,450.00 

"  31  Gross  Profit  carried  to 

Profit  and  Loss  .  .  .  10,150.00 


$40,600.00 


1922 
Jan.  31  Sales $40,600.00 


$40,600.00 


The  Trading  Account  is  only  a  summary  account,  which  is  set  up  at 
the  end  of  the  accounting  period  for  the  purpose  of  recording  permanently 
the  gross  profit  for  each  period.  In  actual  practice  it  will  often  be  found 
that  the  closing  entries  are  made  directly  to  the  Profit-and-Loss  Account. 

You  should  now  examine  this  Trading  Account  together  with  that 
illustrated  in  Assignment  23.  You  will  note  that  by  maintaining  per- 
petual inventories  it  is  not  necessary  to  set  up  the  finished  goods  inven- 
tory by  debiting  or  crediting  the  Trading  Account,  as  the  case  may  be, 
because  the  inventory  is  already  on  the  books. 

The  Goods-in-Process  Account  compares,  in  a  similar  manner,  with 
the  Manufacturing  Account  in  Assignment  23. 

The  perpetual  inventory  thus  enables  the  accountant  to  ascertain  the 
financial  condition  of  the  business  at  the  close  of  every  month  thru  the 
preparation  of  a  balance  sheet  and  profit  and  loss  statement,  without 
taking  a  physical  inventory. 

MAIN  POINTS  OF  THIS  ASSIGNMENT 

This  problem,  taken  from  the  Beaver  Manufacturing  Company  and 
carried  thru  Assignments  28  and  24,  illustrates  in  a  very  practical  way 
the  application  of  the  most  fundamental  principles  of  factory  accounting. 
There  are  many  other  important  features  that  are  essential  to  a  knowledgei 
of  cost  accounting,  which  will  be  treated  fully  in  a  later  section  of  your 
course. 

For  the  present,  we  are  concerned  with  certain  elementary  principles 
that  govern  manufacturing  accounts,  which  may  be  briefly  summarized 
thus: 

First:  The  perpetual  inventory  plan  provides  an  accurate  control  for 
inventories.  Losses  from  theft,  breakage,  etc.,  can  be  quickly  dis- 
covered.   It  also  does  away  with  prolonged  shutdowns. 

Second:  It  provides  an  accurate  record  of  materials  in  case  of  loss  by 
fire. 

Third:  It  makes  possible  monthly  statements  without  the  work  of 
taking  physical  inventories. 

Fourth:  The  perpetual  inventory  records  are  controlled  by  accounts 
on  the  general  ledger. 

1.  Raw-Materials  Account  controls  the  stores  ledger. 

2.  Goods-in-Process  Account  controls  the  cost  ledger. 

3.  Finished-Goods  Account  controls  the  finished-stock  ledger. 

Assignment  24,  Page  20 


Fifth :  The  stores  ledger  accounts  contain  a  record  of  goods  received, 
goods  taken  out,  and  balance  on  hand.  Entries  are  made  from  the 
material  requisitions. 

Sixth:  The  cost  ledger  is  made  up  of  cost  sheets,  one  for  each  pro- 
duction order.  The  cost  sheet  contains  a  record  of  material  used, 
direct  labor,  and  overhead.  The  data  on  the  cost  sheet  is  taken 
from  the  material  requisitions,  the  direct-labor  reports,  and  the 
overhead  distribution. 

Seventh:  Overhead  may  be  distributed  in  various  ways.  In  this  as- 
signment it  is  distributed  according  to  direct-labor  hours. 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  24 

You  are  asked  to  solve  the  following  problems  which  have  been  selected 
from  various  manufacturing  plants  and  adapted  to  the  discussion  of  this 
assignment : 

1.   The  inventories  of  the  Piston  Ring  Company  at  the  close  of  the  year 
ending  December  31,  1921,  are  as  follows: 

Raw  Material   $16,835.00 

Goods  in  Process  11,910.00 

Finished  Goods  28,812.00 

During  the  month  of  January,  1922,  the  purchases  of  raw  materials 
amounted  to  $18,498.00.  A  summary  of  material  requisitions  showed 
that  there  had  been  charged  to  production  orders  during  the  month 
raw  materials  to  the  amount  of  $17,308.00. 

The  direct  labor  charged  to  production  orders  during  the  month  was 
$23,785.00. 

The  overhead  charged  to  production  orders  on  the  basis  of  direct-labor 
hours  amounted  to  $13,325.00. 

The  total  factory  cost  of  goods  finished  during  January  was  $36,310.00. 

The  sales  to  customers  amounted  to  $75,500.00,  the  cost  of  which  was 
$50,400.00. 

(a)  Show  journal  entries  for  recording  transactions  during  January. 

(b)  Prepare,  as  of  January  31, 1922,  the  following  ledger  accounts: 

Raw  Material 
Goods  in  Process 
Finished  Goods 
Cost  of  Goods  Sold 
Sales 

(c)  Indicate  the  amount  and  per  cent  of  gross  profit  on  the  sales  for 
January. 

'{  Assignment  24,  Page  21 


2.  State  clearly  what  transaction  or  operation  probably  caused  each  of  the 
following  entries  to  be  made,  and  from  what  source  you  will  get  the 
information  to  determine  the  amount  of  the  entry  in  each  case: 

(a)  Materials  in  Process  $200.00 

Materials ' $200.00 

(b)  Accounts  Receivable  (J.  B.  Jones)  $800.00 

Sales $800.00 

Cost  of  Goods  Sold $600.00 

Finished  Goods  in  Stock  $600.00 

(c)  Direct  Labor  $200.00 

Cash $200.00 

3.  Using  the  following  data,  prepare  a  cost  sheet  for  Production  Order 
No.  22,  which  requires  2,000  of  Article  A  to  be  manufactured  for  fin- 
ished stock.  The  order  was  started  December  15  and  completed  De- 
cember 31,  1922. 

The  following  is  a  list  of  material  requisitions: 

Date  Number  Material  Quantity  Amount 

Dec.  15  846  Material  X  2,200  lbs.  $1,320.00 

"  18  897  "    X         800  "  480.00 

"  20  911  "    Y  3,100  "  2,325.00 

"  23  932  "    Y         900  "  675.00 

"  27  975  "    Z         500  "  500.00 

From  the  weekly  labor  summaries  the  following  information  applying 
to  this  order  is  obtained. 

Week  Ending  Amount  Hours 

Dec.  16  $197.00  380 

"  23  850.00  1,680 

"  30  213.00  540 

Overhead  expense  is  distributed  on  the  basis  of  direct-labor  hours,  the 
rate  being  $0.80  per  hour. 


Assignment  24,  Page  22 


Higher  Accountancy 

Ol  ID 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  25 

CLASSIFICATION  OF  ACCOUNTS 


I 


TOO  many  young  men  have  an  idea  that  opportunity 
must  be  thrust  upon  them,  and  do  nothing  to  prepare 
themselves  for  grasping  it  when  it  comes.  In  spite  of  the 
fact  that  our  company  has  refused  to  go  outside  for  its 
officials  and  has  promoted  men  from  the  ranks,  we  have 
had  case  after  case  where  we  have  actually  tried  to  thrust 
promotion  upon  men  who  were  apparently  ambitious  but 
who  had  left  themselves  unprepared. 

WALTER  C.  ALLEN 

President 

Yale  &  Towne  Lock  Company 


LaSalle  Extension  University 

Chicago 


NHA-2S 
(1-43) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.i-e  Extension  University 

Printed  in  the  U.  S.  A. 


CLASSIFICATION  OF  ACCOUNTS 

Accountants  aim  to  keep  their  records  in  an  orderly  and  accurate  man- 
ner, so  that  at  any  time  they  can  collect  from  these  records  any  information 
that  the  business  man  desires. 

To  provide  an  effective  and  usable  record,  it  is  necessary  to  classify 
properly  all  details  that  go  into  the  record.  It  is  also  essential  to  classify 
the  data  when  taken  from  the  record  and  summarized  in  the  accounting 
statements  and  reports.  In  other  words,  classification  is  one  of  the  funda- 
mental principles  running  thruout  all  accounting  work.  To  be  able  to  clas- 
sify accounting  facts  properly  is  one  of  the  chief  qualifications  of  the  good 
accountant. 

In  the  preceding  assignments,  classification  has  been  illustrated  in 
many  ways.     For  example,  the  following  methods  have  been  explained: 

1.  Items  on  the  balance  sheet,  the  profit  and  loss  statement,  and 
the  manufacturing  statement  should  be  so  classified  that  busi- 
ness men  will  find  it  easy  to  understand  and  interpret  them. 

2.  Transactions  are  so  classified  in  the  ledger  accounts  as  to  pro- 
vide definite  summaries  for  the  statements. 

8.  Entries  in  the  special  journals  are  classified  into  columns  to 
make  possible  the  posting  of  totals  to  the  ledger. 

4.  The  ledger  is  subdivided  and  all  customers'  and  creditors'  ac- 
counts are  classified  respectively  into  the  accounts  receivable 
and  accounts  payable  groups. 

5.  Auxiliary  records  are  arranged  for  the  classification  of  numerous 
details,  as  the  petty  cash  book,*  the  car  record  book,  the  insur- 
ance book,  the  note  register,  etc. 

6.  The  working  sheet  aids  in  properly  classifying  items  preliminary 
to  preparing  the  balance  sheet  and  the  profit  and  loss  statement. 

7.  The  voucher  system  and  the  perpetual  inventory  system  make 
possible  a  more  detailed  classification  of  charges  and  costs. 

8.  In  factory  accounting,  the  costs  and  expenses  of  manufacturing 
are  classified  separate  from  the  administrative  and  selling  ex- 
penses, so  as  to  provide  information  that  is  important  to  the 
manufacturer. 

This  is  a  brief  summary  of  the  various  phases  of  the  principles  of  clas- 
sification in  accounting.  Other  uses  might  be  mentioned,  but  these  eight 
show  plainly  their  importance  to  the  accountant.  The  chief  purpose  is  to 
provide  an  accurate  summary  of  business  transactions  in  financial  state- 
ments that  are  explanatory  of  results.  In  other  words,  classification  helps 
the  accountant  to  secure  and  classify  information  which  will  aid  the  busi- 


ness  man  to  control  his  business  most  efficiently.  These  general  principles 
apply  especially  to  the  grouping  of  accounts  and  the  securing  of  business 
statistics. 

How  Ledger  Accounts  Are  Classified.  While  accounts  have  been 
grouped  in  various  ways  by  different  accounting  authorities,  there  are  two 
methods  that  have  been  used  more  than  any  others.  With  these  you  should 
be  thoroly  familiar. 

Accounts  were  originally  classified  into  two  groups,  personal  and  imper- 
sonal. 

1.  Personal  accounts  included  all  accounts  with  persons ;  for  exam- 
ple, customers,  creditors,  and  proprietors. 

2.  Impersonal  accounts  included  all  such  accounts  as  Cash,  Mer- 
chandise, Equipment,  Buildings,  etc. 

This  is  the  classification  that  was  used  first  when  the  double  entry  sys- 
tem was  adopted  in  place  of  the  single  entry  system.  According  to  the 
single  entry  method,  which  will  be  explained  in  the  next  assignment,  ac- 
counts were  kept  only  with  persons.  When  double  entry  was  introduced, 
new  accounts  were  also  set  up  for  various  assets  and  liabilities;  in  other 
words,  impersonal  values.  Naturally,  with  this  transition  accounts  were 
classified  into  two  groups,  namely,  personal  accounts  and  impersonal  ac- 
counts. 

This  classification,  however,  proved  to  be  inadequate,  because  it  did  not 
meet  the  statistical  needs  of  business.  As  the  science  of  business  devel- 
oped, there  sprang  up  a  greater  demand  for  information  on  every  phase 
of  business  operations.  The  result  was  a  grouping  of  accounts  more  in 
accordance  with  business  functions  so  that  they  could  be  easily  summarized 
in  the  financial  statements,  as  explained  in  the  following  paragraph. 

Accounts  are  now  generally  classified  as  real  and  nominal. 

•  1.    Real  accounts,  which  show  the  financial  condition  of  a  business, 

such  as —  • 

Assets 

Liabilities 

Capital 

2.    Nominal  accounts,  which  show  the  progress  from  operations, 
resulting  in  an  increase  or  decrease  of  capital. 

(a)  Trading  accounts,  such  as  Purchases,  Sales,  Purchase  Re- 
turns, Sales  Returns,  etc. 

(b)  Manufacturing  accounts,  such  as  Supplies,  Labor,  Repairs, 
Depreciation,  etc. 

(c)  Selling  and  administrative  accounts,  such  as  Salesmen's 
Commissions,  Delivery  Expense,  Advertising,  Postage,  In- 
surance, etc. 

(d)  Income  charges  and  credits,  such  as  Interest,  Sales  Dis- 
counts, Purchase  Discounts,  Miscellaneous  Income  and  Ex- 
pense. 

Assignment  25,  Page  2 


ft 


I 


This  broad  classification  of  accounts  into  the  real  and  nominal  groups 
is  the  basis  for  all  scientific  account  construction.  It  is  the  controlling 
principle  back  of  all  accurate  accounting.  These  large  groups  are  still 
further  subdivided  in  the  following  discussion. 

Classes  of  Assets.  Assets  are  classified  into  subgroups  according  to 
the  nature  of  the  assets ;  for  example,  current,  fixed,  intangible,  deferred, 
etc.  Each  of  these  groups  in  turn  includes  a  certain  number  of  primary 
or  detail  accounts.     The  various  detail  accounts  might  be  grouped  thus: 

CURRENT  ASSETS 
Cash 

Accounts  Receivable 
Notes  Receivable 
Raw  Material 
Goods  in  Process 
Supplies 

Merchandise  ob  Finished  Goods 
Accrued  Interest  Receivable,  etc. 

FIXED  ASSETS 
Buildings 
Equipment 
Machinery 

INTANGIBLE  ASSETS 
Goodwill 
Patents,  Trade-Marks,  etc, 

DEFERRED  ASSETS 
Prepaid  Insurance 
Prepaid  Rent 
Advertising 
Organization  Expense 
Moving  Expense 

Classes  of  Liabilities.  Liabilities  are  classified  into  current  and  fixed, 
according  to  whether  the  indebtedness  is  for  a  short  or  long  period.  Ac- 
counts Payable,  for  example,  are  current  liabilities,  because  they  will  be 
paid  within  a  reasonably  short  time;  Bonds  Payable,  on  the  other  hand, 
are  fixed  liabilities,  since  they  usually  run  for  a  period  of  years.  Some 
special  provision  is  usually  made  for  their  payment  by  means  of  a  sinking 
fund.     The  various  detail  accounts  might  be  grouped  thus: 

CURRENT  LIABILITIES 

Accounts  Payable 

Notes  Payable 

Accrued  Interest  Payable,  etc. 

FIXED  LIABILITIES 

Mortgages 
Bonds  Payable 
Long-Term  Notes 
Debenture  Bonds 

Assignment  25,  Page  3 


Proprietary  Interest  or  Net  Worth.  The  third  class  of  real  accounts 
represents  capital  or  net  worth.  Net  worth,  in  a  single  proprietership,  is 
carried  in  one  account,  that  of  the  owner;  in  a  partnership,  the  ownership 
is  distributed  in  the  Capital  Accounts  of  the  several  partners;  and  in  a 
corporation,  the  proprietary  interest  is  shown  in  two  accounts,  one  for 
Capital  Stock,  and  the  other  for  Surplus. 

Trading  Accounts.  Every  business  has  certain  trading  activities  which 
consist  of  the  buying  and  selling  of  merchandise  or  the  purchasing  of  raw 
materials  to  be  sold  later  as  a  manufactured  product.  Accordingly,  two 
main  groups  of  accounts  are  needed  to  determine  the  gross  profit :  a  sales 
group  and  a  purchase  group.    The  primary  accounts  might  be  as  follows: 

PURCHASES 

Gross  Purchases 
Purchase  Returns 
Purchase  Allowances 
Freight  Inward 

SALES 

Gross  Sales 
Sales  Returns 
Sales  Allowances 

In  the  case  of  manufacturing,  there  is  added  to  the  raw  materials,  as 
they  are  processed  in  the  factory,  the  direct  labor  and  manufacturing  ex- 
penses, in  order  to  determine  the  cost  of  production.  The  special  features 
of  factory  accounting  dealing  on  this  subject  were  fully  explained  in  As- 
signments 23  and  24.  In  making  a  classification  of  accounts,  the  elements 
of  direct  labor  and  factory  expenses  are  generally  grouped  together,  as 
stated  in  the  following  section. 

Manufacturing  Accounts.  The  special  accounts  needed  by  a  manufac- 
turing concern  are  those  arising  from  the  manufacturing  operations. 
They  consist  of  direct  labor,  power  purchased  or  produced,  and  such  fac- 
tory expenses  as  heat  and  light,  depreciation,  taxes,  and  insurance.  All 
these  costs  and  expenses  are  kept  separate  from  other  operating  expen- 
ses, so  that  the  cost  of  production  can  be  easily  determined  and  controlled. 

Selling  and  Administrative  Accounts.  These  accounts  are  subdivided 
according  to  the  kind  and  amount  of  information  desired  by  the  manage- 
ment. In  a  large  concern,  more  detail  accounts  are  needed  than  in  a 
small  concern.  Many  businesses  divide  them  into  three  groups,  each  of 
which  has  several  detail  accounts,  as  follows: 

SELLING  EXPENSES 

Salesmen's  Salaries 
Salesmen's  Traveling  Expenses 
Salesmen's  Commissions 
Advertising 

ADMINISTRATIVE  EXPENSES 

Officers'  Salaries 

Office  Salaries 

Postage 

Telephone  and  Telegraph 

Assignment  25,  Page  4 


GENERAL  EXPENSE 

Depreciation 

Taxes 

Insurance 

Income  Charges  and  Credits.  Under  this  heading  are  grouped  all 
accounts  for  incidental  or  nonoperating  transactions,  such  as  Interest 
Expense  and  Interest  Earned,  Discounts  Allowed  and  Discounts  Earned, 
etc.  These  expenses  and  incomes  are  incidental  in  that  they  are  not  a 
part  of  the  operations  of  the  business.  Business  men  want  to  know 
what  their  true  operating  profit  is  regardless  of  financial  circumstances. 
That  is  why  all  such  transactions  are  recorded  in  a  group  of  accounts 
separate  from  the  operating  accounts. 

Problem  Illustrating  Classification  of  Accounts.  An  easy  way  to 
understand  the  classification  of  accounts  is  to  take  a  trial  balance,  such 
as  the  one  given  in  Figure  1,  and  group  the  accounts  into  their  proper 
classes. 


C.  G.  Wilson 
TRIAL  BALANCE,  December  31,  1922 


Delivery  Equipment  $   700.00 

Accounts  Payable  $   780.00 

Accounts  Receivable  3,640.00 

Capital,  C.  G.  Wilson  5,633.00 

Cash 1,255.00 

Sales  Discount  146.00 

Furniture  and  Fixtures  500.00 

Income  from  Rent 195.00 

Insurance  Expense  330.00 

Interest  Expense  110.00 

Merchandise  Inventory  January  1,  1922  1,670.00 

Notes  Payable  2,000.00 

Notes  Receivable  1,600.00 

Office  Expense  .  .  645.00 

Purchases  6,810.00 

Purchase  Discounts  114.00 

Rent 1,375.00 

Sales 12,460.00 

Selling  Expense  720.00 

Stationery  and  Office  Supplies  (Expense)  416.00 

Wages 1,047.00 

Interest  Receivable  11.00 

Interest  Earned  11.00 

Wages  Payable 17.00 

Interest  Payable  20.00 

Prepaid  Rent  125.00 

Stationery  and  Office  Supplies  (Inventory)  40.00 

Prepaid  Insurance  90.00 


$21,230.00    821,230.00 

Current  Inventory,  $1,960.00 


Trial  B.vlance 

Figure  1. — Using  this  trial  balance,  we  classify  the  accounts  in  theii*  proper  groups. 
Follow  the  discussion  to  see  how  this  is  done. 

Assignment  25,  Page  5 


CLASSIFICATION  OF  ACCOUNTS  FOR  C.  G.  WILSON 

I — Real  Accounts 

CURRENT  ASSETS 
Cash 

Merchandise 
Accounts  Receivable 
Notes  Receivable 
Accrued  Interest  Receivable 

FIXED  ASSETS 

Delivery  Equipment 
Furniture  and  Fixtures 

DEFERRED  CHARGES 
Prepaid  Rent 
Prepaid  Insurance 
Stationery  and  Office  Supplies 

CURRENT  LIABILITIES 

Accounts  Payable 
Notes  Payable 
Accrued  "Wages  Payable 
Accrued  Interest  Payable 

PROPRIETORSHIP 

C.  G.  Wilson,  Capital 

II — Nominal  Accounts 

TRADING  ACCOUNTS 

Purchases 
Sales 

OPERATING  EXPENSES 

Selling  Expense 
Wages 

ADMINISTRATIVE  EXPENSE 

Stationery  and  Office  Supplies 
Office  Expense 

GENERAL  EXPENSE 
Rent 

Insurance 

INCOME  CHARGES  AND  CREDITS 

Income  Charges 
Sales  Discounts 
Interest  Expense 

Income  Credits 

Income  from.  Rent 
Interest  Earned 
Purchase  Discounts 


Assignment  25,  Page  6 


You  should  study  carefully  this  classification  before  reading  further 
in  the  assignment.  In  this  way  you  will  more  easily  grasp  the  under- 
lying principles  which  are  discussed. 

Reasons  for  Grouping  Accounts  into  Classes.  There  are  numerous 
advantages  resulting  from  the  classification  of  accounts.  Note  especially 
the  following: 

1.  Classification  of  accounts  helps  the  accountant  to  distinguish  clearly 
between  capital  and  revenue  expenditures.  For  example,  a  capital 
expenditure,  say  $1,500  for  an  auto  truck,  may  be  incorrectly 
brought  into  the  Delivery  Expense  Account  instead  of  the  Deliv- 
ery Equipment  Account,  unless  it  be  clear  from  the  start  that  this 
transaction  is  a  charge  to  an  account  in  the  asset  group  rather  than 
to  an  account  in  the  operating  expense  group.  Thus,  by  first  plac- 
ing the  transaction  in  the  proper  group,  the  chances  for  error 
are  greatly  reduced.  All  that  remains  to  be  done  is  to  charge  the 
proper  account  in  the  asset  group.  The  auditor  is  especially  inter- 
ested in  detecting  incorrect  entries  for  Capital  and  Revenue  expendi- 
tures. 

2.  Classification  of  accounts  aids  in  the  preparation  of  the  financial 
statements  because  the  accounts  are  properly  grouped  in  the  ledger 
with  as  little  mixture  of  the  real  and  nominal  elements  as  possible. 
Thus,  the  accounts  can  be  conveniently  summarized  in  the  state- 
ments. 

3.  Furthermore,  a  good  classification  makes  possible  a  further  sub- 
division of  detail  accounts  to  meet  the  demands  of  an  expanding 
business.  As  the  business  grows,  there  will  be  greater  need  for 
detail  information;  hence,  new  accounts  can  be  set  up  in  which 
this  information  is  to  be  collected.  As  these  accounts  grow  in 
number,  it  will  be  all  the  more  necessary  that  they  be  properly 
related  to  all  the  other  accounts.  This  can  be  accomplished  best 
by  classifying  all  new  accounts  in  their  proper  groups. 

Advantages  of  Uniform  Classification  of  Accounts.  During  recent  years 
an  effort  has  been  made  on  the  part  of  certain  trade  associations  to  develop 
uniform  classifications  of  accounts  for  certain  trades  and  lines  of  industry. 

For  example,  the  United  T\TDothetae  of  America  has  developed  a  stand- 
ard classification  of  accounts  for  printing  concerns  and  allied  businesses. 
Such  a  uniform  classification  is  intended  to  aid  the  printing  business  to 
maintain  orderly  records,  so  that  when  the  operating  costs  of  various 
printing  firms  are  compared  these  costs  will  be  on  the  same  basis,  and 
therefore  the  results  of  the  comparison  will  be  reliable  and  will  reflect  the 
facts. 

Uniform  classifications  have  also  been  worked  out  by  such  associations 
as  the  National  Canners  Association,  the  Portland  Cement  Association,  the 
Cooperative  League  of  America,  the  National  Retail  Dry  Goods  Associa- 
tion, and  others. 

Assignment  25,  Page  7 


Corporations  regulated  by  the  government,  such  as  railroads,  steam- 
ship lines,  banks  that  are  members  of  the  federal  reserve  system,  etc.,  are 
required  to  use  account  classifications  recommended  by  the  Interstate  Com- 
merce Commission  and  the  Federal  Reserve  Board.  This  requirement  is 
made  for  the  sake  of  convenience,  so  that  reports  required  of  these  corpora- 
tions may  be  used  for  statistical  purposes.  In  this  way  the  reports  sub- 
mitted by  such  corporations  can  be  compared  without  recasting  and  rear- 
ranging the  accounts. 

Account  Classifications  Vary  According  to  Business  Needs.  It  should 
be  pointed  out  here  that  the  classification  of  accounts  varies  according  to 
the  needs  of  a  certain  business  and  the  ideas  of  certain  business  men. 
Moreover,  accountants  differ  in  their  opinions.  One  accountant  will  classify 
certain  accounts  differently  than  another. 

This  variation,  however,  does  not  affect  the  main  classification.  You 
will  find  that  only  certain  accounts  are  handled  in  different  ways;  for 
example.  Taxes,  Insurance,  Discounts,  Bad  Debts,  etc. 

Taxes  and  Insurance,  for  instance,  in  many  concerns  are  placed  in  the 
general  operating  expense  group,  while  in  other  businesses  they  are  classed 
as  "income  charges."  The  reason  usually  advanced  for  placing  them  in 
the  income  group  is  that  both  items  represent  expenses  for  the  protec- 
tion of  capital.  They  are  therefore  considered  similar  to  interest  that 
is  paid  for  the  use  of  borrowed  capital. 

Discounts  on  Purchases  and  Sales  are  also  handled  in  various  ways. 
In  certain  cases,  they  are  made  deductions  from  Purchases  and  Sales,  and 
hence  belong  to  the  trading  group.  More  generally  they  are  considered 
as  an  income  credit  or  charge.  The  principle  given  for  the  first  method 
is  that  a  discount  has  the  effect  of  reducing  the  amount  actually  paid  or 
received  for  purchases  and  sales.  Due  to  the  fact  that  discounts  are 
primarily  used  to  encourage  prompt  settlement  of  accounts,  and  are  thuj 
very  closely  related  with  the  financial  requirements  of  the  business, 
seems  more  logical  to  classify  them  as  income  items.  You  will  note  that 
they  are  so  considered  in  the  problems  of  this  assignment. 

Losses  from  bad  debts  are  sometimes  shown  as  an  operating,  adminis- 
trative or  selling  expense,  and  at  other  times  as  an  income  charge.  If  a 
regular  provision  for  losses  from  bad  debts  is  made  for  each  period,  as 
explained  in  Assignment  17,  the  first  method  would  seem  to  be  the  most 
logical.  When,  however,  accounts  are  charged  off  as  they  are  found  tg 
be  worthless  or  uncollectible,  it  is  better  to  consider  them  as  a  charge 
to  income  after  the  net  profit  from  operations  has  been  determined. 

Classification  of  Accounts  Made  More  Valuable  by  Use  of  Numbers, 

Various  methods  of  numbering  accounts  have  been  developed  as  an  aid  in 
the  proper  grouping  of  accounts.  For  example,  the  account  for  cash  in 
the  office  can  be  given  a  certain  number,  the  account  for  cash  in  the  bank 
another,  and  when  referring  to  these  accounts  the  numbers  may  be 
used.  Thus,  by  using  numbers  in  place  of  account  titles,  the  accountant 
saves  considerable  time  in  locating  accounts  in  the  ledger,  and  in  indi- 

Assignment  25,  Page  8 


I 


eating  accounts  on  vouchers  and  in  the  voucher  register.  Numbers  are 
often  used  to  advantage  on  purchase  vouchers,  where  the  charges  are 
classified  by  one  person  and  recorded  by  another. 

Letters  of  the  alphabet  are  also  sometimes  used.  In  some  cases, 
letters  are  combined  with  numbers,  particularly  in  concerns  that  have 
several  operating  departments.  For  example,  a  certain  trading  concern 
in  Chicago  has  four  departments,  whch  are  designated  by  a  letter  of 
the  alphabet,  A,  B,  C,  and  D.  The  Purchase  Account  for  Department  A 
is  designated  as  Account  A  411,  and  that  for  Department  B,  as  B  411. 
Whatever  numbering  device  is  employed,  it  should  always  provide  for 
expansion.  That  is,  the  numbers  should  be  assigned  to  accounts  in 
such  a  way  that  when  new  accounts  are  needed,  they  can  be  numbered 
without  changing  the  entire  numbering  system  of  accounts. 

The  number  system  has  two  advantages:  ' 

It  aids  in  the  logical  grouping  of  the  accounts ;  that  is,  the  accounts 
are  brought  into  their  natural  sequence. 

It  saves  time  in  offices  where  there  is  a  considerable  amount  of 
classifying  and  tabulating  work  to  be  done. 

The  following  classification  of  accounts,  v/hich  was  taken  from  a  mer- 
cantile business,  does  this  very  thing.  It  admits  of  further  expansion, 
and  for  this  reason  has  met  with  considerable  favor. 

CLASSIFICATION  OF  ACCOUNTS  BY  NUMBERS 

1.     Assets 

11  CURRENT  ASSETS 

111  Cash 

1111  Cash  in  Bank 

1112  Petty  Cash 

112  Accounts  Receivable 

1121  Accounts  Receivable  A-D 

1122  Accounts  Receivable  E-M 

1123  Accounts  Receivable  N-T 

1124  Accounts  Receivable  U-Z 

113  Notes  Receivable 

114  Accrued  Interest  Receivable 

115  Accrued  Commissions  Receivable 

116  Merchandise  In\^ntory 

12  FIXED  ASSETS 

121  Land 

122  Buildings 

123  Machinery 

124  Delivery  Equipment 

125  Furniture  and  Fixtlties 

Assi^ment  25,  Page  9 


13     DEFERRED  CHARGES 

131  Prepaid  Insurance 

132  Prepaid  Rent 

2.     Liabilities 

21  CURRENT  LIABILITIES 

211  Accounts  Payable  or  Vouchers  Payable 

212  Notes  Payable 

2121  Notes  to  Creditors 

2122  Notes  to  Officers  of  the  Concern 

213  Accrued  Interest  Payable 

214  Accrued  Wages  Payable 

22  FIXED  LIABILITIES 

221  Mortgages  Payable 

222  Bonds  Payable 

2221  Issue  A 

2222  Issue  B 

23  VALUATION  ACCOUNTS 

231  Notes  Receivable  Discounted 

232  Reserve  for  Bad  Debts 

233  Reserve  for  Depreciation 

3.     Capital 

31  CAPITAL  STOCK 

311  Preferred 

312  Common 

32  SURPLUS 

321  Surplus  (Undivided  Profits) 

322  Reserve — Appropriated  Surplus 

4.     Profit  and  Loss 

41     TRADING 

411  Purchases 

412  Purchase  Returns 

413  Purchase  Allowances 

414  Freight  Inward 

415  Cartage  Inward 

416  Sales 

417  Sales  Returns 

418  Sales  Allowances 


Assignment  25,  Page  10 


42     OPERATING 

421  Administrative  Expenses 

4211  Office  Salaries 

4212  Office  Supplies 

4213  Telephone  and  Telegraph 

4214  Postage 

4215  Light  and  Heat 

422  Selling  Expenses 

4221  Salesmen's  Commissions 

4222  Salesmen's  Traveling  Expenses 

4223  Delivery  Expense 

4224  Advertising 

4225  Losses  from  Bad  Debts   (when  losses  are  charged 
against  the  selling  department) 

423  General  Expenses 

4231  Rent 

4232  Depreciation 

4233  Insurance 

4234  Taxes 


5.     Income  Charges  and  Credits 

51  INCOME  CHARGES 

511  Interest  Expense 

512  Sales  Discounts 

52  INCOME  CREDITS 

521  Interest  Earned 

522  Rent  Received 

523  Purchase  Discounts 

Some  accountants  prefer  to  use  a  primary  number  for  each  main  ac- 
count group,  like  the  following: 

1.  Current  Assets 

2.  Fixed  Assets 

3.  Deferred  Assets 

4.  Current  Liabilities 

5.  Fixed  Liabilities 

6.  Reserves 

7.  Capital  and  Surplus 

8.  Revenue  and  Income 

9.  Costs  and  Expenses 

Assignment  25,  Page  11 


Each  of  these  groups  would  then  be  subdivided  and  numbered  thus: 

1.  Current  Assets 

11  Cash 

12  Merchandise 

13  Notes  Receivable 

2.  Fixed  Assets 

21  Land 

22  Buildings 

23  Machinery 

The  simpler  the  numbering  system  the  better.  What  would  be  appro- 
priate for  one  business  might  not  be  usable  by  another  concern.  It  is 
necessary,  therefore,  that  the  accountant  be  thoroly  famihar  with  the 
needs  of  a  business,  so  that  he  can  arrange  a  practical  classification  and 
numbering  system. 

Group  Accounts  Not  Found  on  the  Ledger.  After  you  have  examined 
carefully  the  above  classification,  select  those  that  are  merely  summary 
or  group  accounts,  which  do  not  appear  on  the  ledger.  The  account  1, 
Assets,  for  example,  does  not  appear  on  the  ledger,  neither  does  11, 
Current  Assets,  nor  111,  Cash.  All  these  are  group  accounts,  which  are 
for  purposes  of  classification  on  the  balance  sheet  and  profit  and  loss 
statement  only. 

Accounts  Appearing  in  the  Ledger.  After  you  have  eliminated  from 
the  classification  all  the  group  accounts,  you  should  have  the  following 
accounts  appearing  in  the  ledger.  These  are  sometimes  called  primary 
accounts. 


1111 

121 

213 

321 

4211 

4231 

1112 

122 

214 

322 

4212 

4232 

1121 

123 

221 

411 

4213 

4233 

1122 

124 

2221 

412 

4214 

4234 

1123 

125 

2222 

413 

4215 

511 

1124 

131 

231 

414 

4221 

512 

113 

132 

232 

415 

4222 

521 

114 

211 

233 

416 

4223 

522 

115 

2121 

311 

417 

4224 

523 

116 

2122 

312 

418 

4225 

You  will  find  in  going  over  the  classification  that  certain  detail  accounts 
might  be  set  apart  in  subsidiary  ledgers.  These  would  then  be  controlled 
by  a  representative  account  on  the  general  ledger.  For  example,  112, 
Accounts  Receivable,  may  be  made  a  controlling  account,  with  the  sub- 
accounts 1121  to  1124  as  subsidiary  accounts;  421,  Administration  Ex- 
pense may  also  be  used  as  a  controlling  account  for  the  group  4211  to 
4215. 

Importance  of  Clear  and  Definite  Account  Titles.  The  account  name 
or  title  should  represent  what  the  account  contains,  and  should  indicate 
its  main  classification.  Some  account  titles  are  misleading  and  confusing. 
For  example,  the  title  Freight  Account  does  not  show  clearly  whether 

Assignment  25,  Page  12 


I 


it  is  a  record  of  freight  paid  on  goods  coming  to  the  business  or  freight 
paid  on  goods  going  out  to  customers.  It  would  be  better  to  have  two 
accounts  for  freigiit,  one  for  freight  in  and  another  for  freight  out. 

An  auditor  who  was  recently  examining  the  books  of  a  manufacturing 
concern  found  that  entries  had  been  made  incorrectly  on  the  books  for 
certain  interest  transactions.  This  was  due  to  the  fact  that  several 
accounts  were  kept  for  interest.  There  were  three  accounts  on  the  ledger, 
and  all  three  had  the  same  title,  "Interest."  One  was  for  interest  earned, 
another  for  interest  expense,  and  another  for  accrued  interest,  in  which 
interest  receivable  was  debited  and  interest  payable  was  credited. 

It  was  suggested  that  each  of  these  accounts  be  given  the  proper  title, 
Interest  Earned  and  Interest  Expense,  also  that  the  Accrued  Account 
be  divided  into  two  accounts,  one  for  Accrued  Interest  Receivable  and 
another  for  Accrued  Interest  Payable.  In  this  way  the  account  titles 
indicated  to  what  classification  each  account  belonged. 

Another  example  of  an  improperly  named  account  is  the  old  Merchan- 
dise Account  which  has  now  been  almost  entirely  done  away  with.  In 
its  place  we  have  separate  accounts  for  purchases,  sales,  and  inventory. 
A  good  accounting  principle  is  to  make  the  balance  of  every  account  show 
one  fact,  so  that  its  elements  do  not  need  to  be  analyzed. 

CONTENTS  OF  EACH  ACCOUNT 

A  classification  of  accounts  is  incomplete  unless  accompanied  by  an 
explanation  of  the  character  of  each  classification,  the  nature  of  each 
account,  and,  in  general,  the  kind  of  transactions  to  be  charged  or 
credited  to  it. 

Thru  previous  assignments  you  have  gained  some  knowledge  of  the 
use  and  purpose  of  the  usual  accounts  to  be  kept.  Certain  accounts,  how- 
ever, require  special  consideration.  You  should  be  so  thoroly  acquainted 
with  the  classification  of  accounts  given  in  this  assignment  that  you 
can  give  accurate  directions  for  their  use  from  memory. 

1.  Asset  Accoisnts 

This  term  is  applied  to  that  class  of  accounts  which  record  properties, 
claims,  and  other  values  owned.    It  is  used  only  on  the  balance  sheet. 

11  CURRENT  ASSET  ACCOUNTS.  Current  Assets  is  a  term  that 
applies  to  the  assets  which  will,  in  the  course  of  ordinary  business 
operations,  be  converted  into  cash.  It  is  used  only  on  the  balance 
sheet. 

Ill  Cash.  This  account,  in  the  illustration  given,  is  an  account 
for  the  two  following  cash  accounts.  It  may  be  used  on  the 
balance  sheet  to  include  all  cash,  but  generally  it  is  better  to 
show  the  detail  accounts  given  here. 

1111     Cash  in  Bank.     This  title  is  generally  used  for  the  ac- 
count which  shows  the  general  cash  receipts  and  disbursements. 

Assignment  25,  Page  13 


It  is  debited  with  the  total  cash  received  each  period  and  credited 
with  the  total  cash  disbursed.  The  balance  should  agree  thru 
reconcilement  with  the  balance  in  the  bank. 

1112  Petty  Cash.  An  account  called  "Petty  Cash"  is  kept  for 
the  office  fund.  It  is  debited  with  the  original  amount  placed  in 
the  petty  cash  fund  and  with  any  additions  made  later  to  the 
fund.  It  is  credited  only  when  the  amount  of  the  fund  is  re- 
duced. During  its  existence  there  should  always  be  either  actual 
cash  or  petty  cash  vouchers  on  hand  to  equal  the  fund.  The 
balance  of  the  account  represents  a  current  asset. 

112  Accounts  Receivable.  This  title  applies  to  the  group  of  four 
controlling  accounts  given  as  follows: 

1121  Accounts  Receivable  A-D 

1122  Accounts  Receivable  E-M 

1123  Accounts  Receivable  N-T 

1124  Accounts  Receivable  U-Z 

Each  of  the  above  is  a  controlling  account  on  the  general  ledger  for  a 
section  of  the  customers'  ledger.  The  account  is  debited  with  total  charges 
from  sales  and  with  any  adjustments  made  with  customers  that  increase 
the  amounts  due  from  them.  The  account  is  credited  with  the  collections 
from  customers,  as  recorded  in  the  cash  book,  with  returns  and  allow- 
ances, and  with  any  losses  from  bad  debts.  The  balance  of  each  con- 
trolling account  should  agree  with  the  total  of  the  subsidiary  ledger. 

113  Notes  Receivable.  Notes  Receivable  is  a  current  asset  account. 
It  is  debited  with  the  face  value  of  notes  accepted  from  cus- 
tomers or  other  debtors.  It  is  credited  with  the  cash  received 
in  payment  of  such  notes,  and  with  notes  discounted  on  which 
the  contingent  liability  has  been  removed.  In  case  renewal 
notes  are  taken,  the  old  note  should  be  credited  and  the  new 
one  debited.  Notes  taken  from  officers  or  employes  should  be 
carried  in  a  special  account.  The  balance  of  the  account,  after 
deducting  the  amount  of  Notes  Receivable  Discounted,  is  a 
current  asset. 

116  Merchandise  Inventory.  This  account  is  debited  with  the  inven- 
tory at  the  beginning  of  the  period.  It  is  credited  at  the  end 
of  each  period,  when  closing  the  books,  with  the  previous  inven- 
tory. The  current  inventory  is  then  entered  as  a  debit,  which 
represents  a  current  asset. 

12  FIXED  ASSET  ACCOUNTS.  Fixed  assets  is  a  term  that  applies 
to  those  accounts  which  represent  the  properties  and  other  values 
of  a  permanent  nature  to  be  continually  retained  as  the  fixed  invest- 
ment of  the  business. 

121  Land.  This  account  is  for  recording  the  cost  of  land  and  land 
improvements.  The  term  "land  improvements"  does  not  include 
buildings  and  other  structures,  but  means  improvements  such 

Assignment  25,  Page  14 


as  roadways,  curbing,  sidewalks,  drainage,  etc.  The  account 
will  alwaj^s  show  a  debit  balance.  It  should  be  credited  only 
when  land  is  sold  for  the  cost  value  of  the  portion  disposed  of. 

122  Buildings.  The  Building  Account  is  debited  with  the  original 
cost  of  the  buildings,  and  with  any  additions  or  extensive  im- 
provements. It  is  credited  with  the  cost  in  case  of  sale,  or 
when  the  property  is  disposed  of  or  destroyed.  The  deprecia- 
tion which  accrues  periodically  is  not  credited  to  the  Asset 
Account,  but  is  carried  in  a  Reserve  for  Depreciation  Account. 

123  IVIachinery.  The  Machinery  Account  is  debited  with  the  orig- 
inal cost  of  machinery  and  with  any  important  replacements  or 
betterments,  as  well  as  additions.  It  is  credited  with  the  cost 
of  all  machinery  sold,  destroyed,  retired,  or  replaced.  There 
should  always  be  a  debit  balance,  which  is  offset  by  the  accumu- 
lated accrued  depreciation. 

124  Delivery  Equipment.  This  account  is  debited  with  the  pur- 
chase of  horses,  wagons,  autos,  etc.,  that  are  to  be  used  for 
delivery  purposes.  It  is  credited  for  the  cost,  whenever  any 
of  the  above  property  is  disposed  of  or  removed  from  use.  It 
is  offset  by  the  accrued  depreciation,  the  balance  being  a  fixed 
asset. 

125  Furniture  and  Fixtures.  This  account  records  the  cost  of  all 
furniture  and  equipment,  including  such  items  as  window  shades, 
curtains,  rugs,  etc.  Care  should  be  taken,  however,  not  to 
charge  the  account  with  articles  which  have  a  life  of  less  than 
one  year.  Like  the  three  accounts  above,  it  is  offset  by  the 
accrued  depreciation. 

13  DEFERRED  CHARGES.  This  account  provides  a  classification  for 
all  prepaid  expenses.  For  example,  Insurance  (shown  as  131)  may 
be  paid  for  three  years.  The  expense  is  distributed  equally  over  the 
three  years,  which  requires  accounts  for  carrying  the  unexpired  or 
deferred  amount.  Other  examples  of  deferred  charges  are  Taxes, 
Rent,  Interest,  etc. 

2.  liiability  Accounts 

This  term  is  applied  to  that  class  of  accounts  which  record  all  indebt- 
edness or  values  owed.    It  is  used  only  on  the  balance  sheet. 

21  CURRENT  LIABILITY  ACCOUNTS.  Current  liabilities  is  a  term 
that  applies  to  those  obligations  which  must  be  paid  within  the  fol- 
lowing period  of  operation.  One  year  is  usually  taken  as  the  time 
limiting  a  current  liability.  All  open  accounts.  Notes  Payable,  and 
accrued  items  usually  fall  under  this  heading. 

211  Accounts  Payable  or  Vouchers  Payable.  All  merchandise  pur- 
chased on  account  gives  rise  to  an  account  payable  or  voucher 
payable.  In  modem  practice,  as  we  have  noted,  these  pur- 
chases are  summarized  in  the  purchase  journal  or  the  voucher 

Assignment  25,  Page  15 


register.  The  total  for  the  period  is  then  posted  to  the  credit 
of  the  Accounts  Payable  Account.  The  account  is  debited  for 
the  payment  made  to  those  creditors  in  settlement. 

212  Notes  Payable.  This  is  a  group  account  under  which  is  classi- 
fied all  indebtedness  in  the  form  of  notes,  including,  generally, 
trade  acceptances  as  well.  For  balance  sheet  purposes,  however, 
notes  payable  are  divided  into  two  classes,  2121  and  2122. 

2121  Notes  to  Creditors.  This  account  shows  the  amount  owed 
in  notes  to  outside  creditors.  It  is  a  credit  account  al- 
ways. It  is  often  an  aid  to  check  notes  paid  against  the 
entry  for  the  note  given,  the  unchecked  entries  being 
the  notes  still  outstanding.  The  interest  on  all  notes 
payable  should  be  debited  to  account  511,  of  course,  and 
only  the  amount  of  the  note  itself  debited  to  this  account. 

2122  Notes  to  Officers.  This  account  is  handled  similarly  to 
2121,  except  it  is  for  notes  given  to  officers  of  the  cor- 
poration. It  is  made  a  special  account  merely  for  the 
purpose  of  proper  statement  on  the  balance  sheet. 

22  FIXED  LIABILITY  ACCOUNTS.  This  is  a  term  applied  to  a  group 
of  accounts  m.ade  up  of  the  long-term  obligations,  such  as  mortgages 
and  bonds.    It  is  used  merely  as  a  balance  sheet  heading. 

23  VALUATION  ACCOUNTS.  In  preceding  assignments  you  have  had 
a  complete  discussion  of  what  is  meant  by  valuation  accounts.  They 
are  directly  related  to  certain  asset  accounts,  in  that  they  represent 
credit  offsets  to  such  accounts.  For  example,  231  Notes  Receivable 
Discounted  is  credited  with  all  notes  receivable  that  are  discounted, 
for  the  sake  of  recording  the  contingent  liabilities  created  in  discount- 
ing notes  receivable.  The  valuation  accounts  are  classed  here  under 
liabilities  simply  because  they  show  credit  balances  and  are  thus  sim- 
ilar to  liabilities  from  a  bookkeeping  point  of  view.  They  are  not,  how- 
ever, strictly  speaking,  liability  accounts,  and  should  always  be  con- 
sidered in  relation  to  their  asset  component. 

3.  Capital 

Capital  represents  the  proprietary  interest,  commonly  called  net  worth. 
It  is  the  net  claim  that  the  owners  have  on  the  business. 

31  CAPITAL  STOCK.  This  account  records  the  original  investment 
made  by  the  various  stockholders.  It  is  divided  into  two  subaccounts, 
which  keep  the  interests  of  preferred  and  common  stockholders  en- 
tirely separate. 

32  SURPLUS.  This  account  accumulates  the  increase  in  investment 
from  all  sources  which  may  be  divided  into  surplus,  entirely  unappro- 
priated, and  appropriated  surplus,  which  has  been  set  aside  by  the 
directors  for  a  designated  purpose. 

Assignment  25,  Page  16 


4.  Profit  and  Loss 

This  classification  has  been  provided  for  the  segregation  of  accounts 
deahng  with  the  direct  operating  activities  of  the  business. 

41  TRADING.  The  trading  accounts  are  those  deahng  with  the  pur- 
chase and  sales  transactions.  The  term  "trading"  primarily  applies 
only  to  trading  concerns,  that  is,  concerns  that  buy  and  sell  com- 
modities for  the  purpose  of  making  a  profit.  The  two  primary  ele- 
ments which  enter  into  the  trading  accounts  are : 

The  total  revenue  from  sales 
The  cost  of  the  goods  sold 

The  total  revenue  from  sales  is  not  all  income,  neither  is  the  total 
cost  of  the  goods  sold  wholly  a  loss,  but  the  difference  gives  the 
gross  profit  or  loss.  The  trading  accounts  form  the  first  section  of 
the  profit  and  loss  statement,  which  is  sometimes  called  the  trading 
statement.  The  exact  nature  of  the  trading  account  is  easily  brought 
out  in  the  case  of  a  shoe  merchant  who  buys  a  pair  of  shoes  for  $4.00 
and  sells  them  for  $5.00.  Here  the  $5.00  is  the  total  sales,  or  incom- 
ing value,  while  $4.00  is  the  cost  of  goods  sold,  or  outgoing  value. 
The  gross  profit  of  $1.00  must  cover  his  operating  expenses  and 
whatever  net  profit  he  finally  realizes. 

411  Purchase  Account.  To  this  account  is  debited  the  invoice  cost 
of  merchandise  bought  to  resell.  At  the  end  of  the  period  the 
total  purchases  becomes  a  charge  to  the  Trading  Account,  where 
it  is  adjusted  by  the  new  inventory  of  merchandise  on  hand. 
If  the  Purchase  Returns  Account,  which  is  explained  below,  is 
not  used,  there  will  be  credits  to  the  Purchase  Account  for  all 
merchandise  not  accepted  and  returned  to  the  vendor. 

412  Purchase  Returns.  This  is  a  credit  account,  which  is  an  offset 
to  Purchases.  It  is  as  if  the  credit  side  of  Purchases  Account 
was  separated  bodily  and  made  into  a  distinct  account.  With 
this  relationship  to  Purchases  Account  in  mind,  it  is  easy  to 
see  that  Purchase  Returns  Account  will  always  have  a  credit 
balance.  At  the  time  of  closing,  the  usual  practice  is  to  trans- 
fer Purchase  Returns  to  the  credit  of  Purchases,  and  thus 
determine  the  net  purchases  for  the  period. 

413  Purchase  Allowances.  This  is  another  credit  account,  and  a 
direct  deduction  from  Purchases.  When  goods  purchased  are 
received  in  an  unsalable  condition  because  of  damage,  faulty 
construction,  substitution  of  cheaper  goods,  etc.,  an  adjust- 
ment is  required  correcting  the  cost  of  the  merchandise.  Altho 
the  account  is  very  similar  to  Purchase  Returns,  it  is  better 
to  keep  a  separate  account  in  order  to  obtain  the  information 
for  management  purposes. 

414  Freight  Inward.  In  making  purchases  at  a  distance,  it  is  cus- 
tomary for  the  buyer  to  pay  the  freight.    This  is  an  additional 

Assignment  25,  Page  17 


cost  of  the  merchandise.  It  is  better,  in  most  cases,  however, 
to  keep  the  freight  cost  as  a  distinct  item,  and  not  charge  the 
freight  direct  to  Purchases.  It  enables  a  closer  check  on  freight 
charges,  and  shows  the  total  amount  by  which  the  merchandise 
is  increased  thru  transportation.  The  theory  that  freight  is 
a  real  cost  is  based  on  the  assumption  that  change  of  location 
for  sales  purposes  adds  to  its  intrinsic  value.  Suppose,  for 
example,  that  we  sell  automobiles.  An  automobile  is  worth 
more  to  a  purchaser  if  it  is  in  his  locality,  than  it  is  at  the 
factory.  The  invoice  cost  may  be  said  to  be  the  form  value; 
the  freight  cost,  the  additional  location  value. 

415  Cartage  Inward.  Where  it  is  desired  for  statistical  purposes,  a 
separate  Cartage  Account  may  be  kept,  but  in  general  it  is 
the  practice  to  include  cartage  in  an  account  with  freight,  called 
"Freight  and  Cartage  Inward."  The  Cartage  Inward  Account 
is  closed  into  the  Trading  Account  at  the  end  of  the  accounting 
period.  As  far  as  this  special  account  is  concerned,  once  it 
is  adopted  it  is  immaterial  whether  the  cost  of  cartage  arises 
in  the  hire  of  public  drays  and  trucks,  or  from  the  expense 
of  maintaining  trucking  equipment.  In  the  first  case,  the  cost 
comes  to  the  Cartage  Account  directly  from  the  cash  book  or 
voucher  register;  in  the  second,  the  cost  is  likely  to  be  only  a 
part  of  another  account,  such  as  Delivery  Expense.  Wlien 
delivery  or  trucking  equipment  is  used  partly  for  delivering 
goods  sold  and  partly  for  carting  goods  received  from  railroad 
to  store,  then  the  total  cost  of  operating  the  delivery  equip- 
ment should  be  prorated  between  Cartage  Inward  and  Cartage 
Outward. 

416  Sales.  To  this  account  is  credited  the  gross  amount  of  the 
goods  sold.  There  should  be  no  debits  to  this  account  except  for 
actual  corrections  in  amount  billed,  which  are  true  offsets  to 
sales.  At  the  end  of  the  period,  the  balance  is  transferred  to 
the  Trading  Account. 

417  Sales  Returns.  This  account  is  simply  an  offset  or  negative 
to  the  Sales  Account.  Its  operation  would  be  similar  to  the 
Purchases  Returns  Account. 

418  Sales  Allowances.  This  account  is  also  a  deduction  from  Sales, 
but  like  Purchase  Allowances,  it  is  usually  the  better  practice 
to  show  the  deductions  on  the  profit  and  loss  statement  as  infor- 
mation for  the  management. 

42  OPERATING.  This  is  merely  a  group  heading  and  would  not  appear 
on  the  ledger.  Generally,  the  three  divisions  under  operating,  as 
shown  in  the  classification,  are  kept  as  analytical  information  on  var- 
ious business  functions. 

421  Administrative  Expenses.  The  accounts  under  this  heading  are 
primarily  for  the  purpose  of  getting  at  the  necessary  expense 
of  administration  of  the  general  business  affairs.     Sufficient 

Assignment  25,  Page  18 


( 


detail  accounts  should  be  provided  to  truly  analyze  this  activity. 
For  example,  Legal  Expense  would  be  charged  with  the  cost  of 
lawsuits,  real  estate  title  investigations,  legal  assistance  in  con- 
nection with  collections,  etc. 

422  Selling  Expenses.  Most  of  the  accounts  listed  in  this  group  are 
self-explanatory.  The  group  should  be  restricted  only  to  ex- 
penses truly  related  to  sales  activities.  Since  a  few  of  them 
may  offer  certain  difficulties,  they  are  discussed  in  detail. 

4222  Salesmen's  Traveling  Expenses.  To  this  account  should 
be  debited  not  only  the  railroad  fare  of  salesmen,  but  also 
any  other  expense  they  may  incur  while  out  on  their 
routes,  such  as  hotel  bills,  livery  hire,  bus  fare,  etc.  Each 
business  house  is  likely  to  have  its  own  rules  as  to  what 
shall  constitute  refundable  expenses ;  some  will  repay  the 
salesman  for  expenses  incurred  in  entertaining  customers, 
while  others  discourage  the  practice  of  entertaining  by 
refusing  to  make  reimbursement.  Very  often  an  indi- 
vidual account  is  kept  with  each  salesman.  If  this  is 
the  practice,  his  account  would  be  credited  with  his  sal- 
ary at  the  end  of  each  month  (Salesmen's  Salary  Account 
being  debited)  and  with  any  commissions  earned  by  him. 
The  account  is  debited  for  all  amounts  withdrawn,  as 
well  as  funds  sent  him  for  expenses.  When  he  renders 
his  report  for  expenses,  his  account  is  then  credited 
(Traveling  Expense  being  debited)  for  the  amount  spent. 
This  credit  would  operate  to  cancel  the  debit  for  money 
advanced  for  expenses,  and  the  account  will  show  at  all 
times  the  balance  either  due  from  or  owed  to  such  sales- 
man. 

4223  DeHvery  Expense.  This  account  should  be  debited  for 
all  expense  of  delivering  goods  to  local  customers.  It 
may  include  the  cartage  hire,  as  well  as  the  cost  of  oper- 
ating a  regular  delivery  service.  The  expense  of  such 
service  would  be  the  wages  of  the  drivers,  repairs  to  equip- 
ment, stable  expense  (in  case  of  horses),  oil  and  gas  (in 
case  of  auto  trucks),  and  other  similar  items. 

4224  Advertising.  This  account  should  be  debited  for  the 
cost  of  space  in  newspapers  and  periodicals,  the  cost  of 
catalogs,  pamphlets,  booklets,  etc.  If  an  advertising  of- 
fice is  maintained,  a  special  account  should  be  provided 
for  its  expenses.  It  should  be  definitely  understood  that 
donations,  gifts,  and  contributions  to  charity  should  not 
be  included  in  this  account.  A  special  account  should  be 
provided  for  all  such  items  under  the  title  "Donations 
and  Subscriptions." 

4225  Losses  from  Bad  Debts.  This  account  is  debited  with  the 
amount  of  accounts  receivable  or  notes  receivable  which 
are  declared  uncollectible.    The  theory  for  considering  it 

Assignment  25,  Page  19 


a  selling  expense  is  that  the  loss  results  from  a  failure 
to  discriminate  between  a  good  risk  and  a  bad  risk  in 
making  a  sale  on  credit.  It  is  regarded  as  one  of  the 
inevitable  results  of  doing  business  on  credit,  hence  a 
cost  of  selling.  As  already  pointed  out  earlier  in  this 
assignment,  Loss  from  Bad  Debts  is  often  treated  as  a 
financial  expense. 

423  General  Expenses.  In  general,  the  accounts  classified  under  this 
title  are  related  more  or  less  to  the  business  as  a  whole,  and  not 
to  any  specific  division  of  management.  For  example,  insurance, 
rent,  taxes,  and  depreciation  may  apply  to  the  general  office, 
as  well  as  to  the  sales  and  shipping  departments.  Part  of 
such  charges  may  even  apply  to  a  stable,  garage,  warehouse,  etc. 
Due  to  the  fact  that  an  accurate  distribution  cannot  be  made, 
they  are  simply  considered  in  a  group  by  themselves  as  general 
expenses. 

Even  where  a  distribution  is  made  to  different  departments, 
based  on  some  method  of  proration,  accounts  are  very  often 
provided  for  such  expenses,  and  the  distribution  made  by  jour- 
nal entry,  charging  the  various  departments  and  crediting  the 
general  expense  accounts. 

5.  Income  Charges  and  Credits 

This  group  provides  for  expenses  and  income,  which  are  not  truly 
operating  expenses.  All  items  of  a  financial  nature,  as  well  as  miscel- 
laneous profits  and  losses  from  outside  sources  would  fall  under  this 
heading. 

MAIN  POINTS  OF  THIS  ASSIGNMENT 

In  this  assignment,  we  have  explained  and  illustrated  the  principle 
of  the  classification  of  accounts  and  the  various  methods  in  use.  The 
principle  of  classification  is  used  thruout  all  accounting  work. 

First:     Recall  the  eight  ways  in  which  the  principle  of  classification 
is  used  in  accounting. 

Second:     Various  methods  of  classifying  accounts. 

1.  Original  method — personal  and  impersonal. 

2.  More  modern  method — real  and  nominal. 

The  second  method  provides  a  detail  record  of  the  business  progress. 

Third:     Real  accounts  are  grouped  into  three  classes,  with  additional 
subclassifications. 

1.     Assets 

Current 

Fixed 

Deferred 

Assignment  25,  Page  20 


2. 

Liabilities 

Current 

Fixed 

Reserves 

3. 

Proprietorship 

Capital 
Surplus 

Fourth:     Nominal  accounts 

are  grouped  thus 

1. 

Trading 

Purchases 
Sales 

2. 

Manufacturing 

3. 

Operating  Expenses 

Selling 

Administrative 

General 

4. 

Income  Charges  and  Credits 

- 

Income  Charges 
Income  Credits 

Fifth:     Advantages  of  account  classifications. 

1.  They  aid  in  distinguishing  between  capital  and  reserve  items. 

2.  They  facilitate  the  preparation  of  accounting  statements. 

3.  They  provide  subdivision  in  the  records  to  meet  the  needs  of 
an  expanding  business. 

Sixth:     Advantages  of  indexing  and  classifying  accounts  by  numbers. 

1.  It  aids  in  bringing  accounts  into  natural  sequence. 

2.  It  saves  time  in  recording  entries  in  vouchers  and  journals. 

Seventh:     Importance  of  definite  account  titles.     Mixed  accounts  to 
be  avoided. 

Eighth:     Description  of  accounts,  especially  the  debits  and  credits  to 
be  made  in  each  account. 


Assignment  25,  Page  21 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  25 

1.  Following  the  classification  shown  on  pages  9-11,  you  are  to  ex- 
amine the  transactions  given  below  and  journalize  them,  using  account 
numbers. 

For  example,  the  proper  journal  entry  for  the  transaction  of  December 
1,  1922,  is  as  follows: 

Dr.  125  Cr.  1111 

Furniture  and  fixtures  purchased  and  paid  for  by  check 

TRANSACTIONS 

Dec.     2  Auto  trucks  purchased  and  paid  by  check. 

2  Gasoline  bought  on  account. 

4  Merchandise  purchased  from  the  Aetna  Furniture  Company  on  account. 

4  Merchandise  sold  on  account  to  Mr.  L.  W.  Taylor. 

5  Cash  received  and  deposited,  from  Mr.  F.  C.  Biddle,  to  apply  on  his  account. 

6  Gave  promissory  note  to  the  Aetna  Furniture  Company. 

7  Postage  paid  out  of  office  funds. 

8  Telephone  rental  paid  by  check. 

9  Office  salaries  paid  by  checks. 

9  Purchase  of  ink  paid  for  out  of  office  cash. 

11  Addition  to  building  on  account. 

12  Merchandise  sold  on  account  to  F.  W.  Fault,  terms  2/10 — n/30. 

13  Ten  days  later  Mr.  Fault  pays  his  bill,  cash  deposited. 

14  Interest  paid  out  of  office  fund. 

15  Two  per  cent  purchase  discount  taken  advantage  of  in  paying  bill  to  North- 
western Stove  Company. 

2.  Make  in  proper  form  a  classification  of  accounts  from  the  follow- 
ing list.  This  classification  should  follow,  in  general,  the  classification 
shown  in  the  assignment,  pages  9-11.  New  number  combinations  should 
be  used  when  necessary,  but  the  general  plan  of  account  numbers  already 
described  should  be  carefully  followed. 


NAMES  OF  ACCOUNTS 


Accounts  Payable 

Accounts  Receivable 

Accrued  Interest  Payable 

Advertising  Expenses 

Bonded  Debt 

Capital  Investment 

Cash  in  Bank 

Cash  in  Office 

Furniture  and  Fixtures 

Hay  and  Grain  Used 

Horses,  Wagons,  and  Harness 

Horseshoeing  Expenses 

Insurance  (Expense) 

Interest  (Expense) 

Land 


Machinery 

Miscellaneous  Stable  Expenses 
Notes  Payable 
Office  Building 
Office  Expenses 
Office  Salaries 
Postage 

Prepaid  Insurance  (Unexpired) 
Pkei>aid   Water   Rent    (Unused   Por- 
tion) 
Printing  and  Stationery  (General) 
Printing  Cataogs  and  Price  Lists 
Purchases 
Salesmen's  Commissions 


Assignment  25,  Page  22 


Salesmen's  Salaries  Teamsters'  Salaries 

Sai^s  Office  Expenses  Telephone  and  Telegraph 

Sales  Traveling  Expenses — Salesmen 

Side  Track  and  Track  Scales  Wagon  and  Harness  Repairs 

Store  Building  Warehouse  A 

Taxes  (Expense)  Warehouse  B 

3.     From  the  following  trial  balance  prepare: 

(a)  A  complete  classification  of  accounts  with  numbers. 

(b)  The  profit  and  loss  statement. 


Morris  Mercantile  Company 
TRIAL  BALANCE,  December  31,  1922 


Debits       Credits 

Cash $  2,457.10 

Notes  Receivable  16,142.00 

Accounts  Receivable  32,071.06 

Merchandise  Inventory,  January  1,  1922  24,993.46 

Store  Building  25,000.00 

Store  Fixtures   7,000.00 

Horses  and  Wagons  2,000.00 

Purchases , 128,987.12 

Taxes 175.00 

Interest  Expense  208.00 

Heat  and  Light 407.00 

Sales  Discounts  692.12 

Salesmen's  Salaries  2,500.00 

Office  Salaries  1,600.00 

Office  Expense  1,000.00 

Insurance  400.00 

Freight  In  1,069.00 

Advertising  500.00 

Cartage  Out  531.00 

Accounts  Payable  $  11,901.19 

Notes  Payable  2,116.47 

Loans  Payable  (6%) 2,000.00 

Mortgage  Payable  (5%) 8,000.00 

Capital  Stock  45,000.00 

Surplus  19,953.83 

Sales 158,100.13 

Rent  of  Hall  over  Store 285.00 

Interest  Earned  132.91 

Purchase  Discounts  243.33 


$247,732.86    $247,732.86 


The  inventory  of  merchandise  on  hand,  December  31,  1922,  was  $27,- 
018.18.  Unexpired  insurance  on  December  31  amounted  to  $160.00.  You 
learn  that  interest  on  the  "loan  payable"  has  only  been  paid  up  to  October 
1,  1922.    You  also  find  that  interest  has  accrued  as  follows: 

Notes  Payable $  10.30 

Notes  Receivable 57.66 

Mortgage  Payable   200.00 

Assignment  25,  Page  23 


You  learn  also  that  the  company  was  incorporated  and  began  business 
January  1,  1921,  and  that  the  item  of  "Taxes"  appearing  on  the  trial 
balance  represents  taxes  for  the  year  1921,  which  should  have  been  taken 
into  account  that  year.  It  is  estimated  that  the  taxes  for  1922  will  be 
$200.00.  The  estimated  loss  on  Accounts  Receivable  is  $651.42.  You 
learn  that  no  depreciation  was  booked  during  1921  and  you  are  told  that 
the  correcting  entries  may  be  made  on  the  following  basis: 

ESTIMATED  DEPRECIATION 

store  Property  $2,000.00 

Store  Fixtures   1,050.00 

Horses  and  Wagons     500.00 

The  same  figures  for  depreciation  may  also  be  used  for  1922. 

You  are  asked  to  send  in  the  following  as  your  solutions  for  problems 
1,  2,  and  3 : 

1.  Journal  entries  for  transactions. 

2.  Classification  of  accounts. 

3.  (a)     Classification  of  accounts. 
(b)     Profit  and  loss  statement. 


Assi^ment  25,  Page  24 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assi|,nment  26 

SINGLE  ENTRY 


IN  directing  the  affairs  of  this  corporation,  I  am 
constantly  depending  upon  the  rudimentary 
lessons  1  learned  in  the  days  when  I  was  an  Accoun- 
tant. I  consider  a  good  working  knowledge  of 
accountancy  essential  to  efficient  executive  adminis- 
tration, for  no  man  can  safely  and  wisely  direct  the 
affairs  of  his  company  without  a  close  and  intimate 
knowledge  of  its  expenditures,  and  their  bearing  on 
its  financial  position  and  profit  and  loss. 

A.  R.  ERSKINE 

President,  Studebaker  Corporation 


LaSalle  Extension  University 

Chicago 


NHA-   26 
(12-152) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following-  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSai.i.e  Kxtension  I^niversity 

Printed  in  the  U.  S.  A. 


SINGLE  ENTRY  BOOKKEEPING 

In  your  study  thus  far  you  have  been  dealing  with  what  is  called  the 
"double  entry"  system  of  keeping  books.  Our  entire  attention  has  been 
given  to  this  method,  because  it  is  the  basis  of  all  modern  accounting  and 
is  generally  recommended  by  most  accountants. 

Double  entry,  however,  has  not  yet  been  universally  adopted.  If  you 
were  to  investigate  the  situation  in  any  community,  you  would  find  many 
businesses  still  using  some  form  of  single  entry. 

Single  entry  is  especially  applicable  to  professional  firm.s,  hotels,  clubs, 
societies,  etc.,  as  well  as  in  the  small  retail  business,  where  the  proprietor 
is  in  daily  touch  with  his  business  affairs.  Such  concerns  are  not  interested 
in  analyzing  profits  and  losses  to  the  extent  demanded  by  the  managers 
of  the  larger  organizations.  Consequently,  single  entry,  which  is  fully 
adequate  for  all  practical  purposes  in  such  instances,  is  the  natural  method 
to  use. 

Single  Entry,  a  Record  of  Personal  Transactions.  What  is  known  in 
accounting  as  pure  single  entry  is  limited  to  a  record  of  transactions  affect- 
ing personal  accounts.  Its  primary  purpose  is  a  protection  against  forget- 
fulness  as  to  what  customers  owe  the  business  and  what  the  business  owes 
its  creditors.  Individual  accounts  will  be  kept  with  all  customers  and  credi- 
tors, the  charges  and  credits  being  made  first  to  a  day  book,  and  posted 
from  there  to  the  personal  account.  Under  modern  business  conditions, 
however,  it  is  very  often  found  that  the  entries  are  made  direct  to  the 
account  from  charge  tickets  and  credit  memoranda. 

The  essential  features  of  single  entry  in  its  simplest  form,  therefore, 
may  be  stated  thus: 

1.  It  records  only  the  transactions  that  affect  personal  accounts. 

2.  It  does  not  for  this  reason  furnish  any  of  the  information  kept 
in  nominal  and  property  accounts. 

From  this  it  is  evident  that  single  entry  does  not  record  the  twofold 
effect  of  every  transaction.  When  Mr.  Smith  buys  $100.00  worth  of  goods 
on  account,  the  amount  will  simply  be  charged  to  Mr.  Smith's  account. 
The  twofold  entry  debiting  Mr.  Smith  as  an  account  receivable,  and  credit- 
ing Sales,  would  not  be  made,  as  would  be  done  if  double  entry  were  used. 
Consequently,  the  correctness  of  the  ledger  cannot  be  tested  by  means  of  a 
trial  balance.  This  fact  that  only  one  side  of  a  transaction  is  recorded  has 
given  rise  to  the  term  "single  entry,"  as  distinguished  from  double  entry. 

Since  single  entry  does  not  make  use  of  nominal  accounts,  there  are  no 
records  for  setting  up  the  regular  profit  and  loss  statement.  Consequently, 
in  order  to  determine  the  net  profit  under  the  single-entry  system,  it  is 
necessary  to  compare  the  capital  or  net  worth  at  the  end  of  the  period 
with  the  capital  at  the  beginning.  This  method  is  fully  explained  and  illus- 
trated in  the  problems  given  in  this  assignment. 

NHA-26 


Why  Accountants  Should  Be  Familiar  with  Single  Entry.     As  has 

already  been  stated,  single  entry  is  still  to  be  found  in  many  businesses, 
especially  small  concerns  and  old  established  firms  which  are  slow  to  adopt 
more  modern  methods  of  business.  For  this  reason  the  accountant  should 
understand  the  operation  of  a  single-entry  set  of  books  and  how  to  prepare 
statements  from  it.  He  may  never  keep  accounts  by  single  entry  himself, 
but  he  may  often  be  called  upon  in  connection  with  certain  problems,  either 
in  auditing  or  investigations,  to  deal  with  records  kept  by  single  entry. 

It  is  important,  therefore,  that  the  accountant  be  familiar  with  single 
entry,  not  so  much  for  bookkeeping  purposes,  as  that  he  will  be  able  to 
render  the  greatest  amount  of  accounting  service. 

Moreover  the  accountant  is  occasionally  asked  to  change  a  set  of  single- 
entry  books  to  double  entry.  In  such  cases  he  is  expected  to  open  the  new 
books  correctly  and  properly  close  the  old  ones.  This  he  cannot  do  unless 
he  is  thoroly  familiar  with  the  special  features  of  the  single-entry  method. 

Single  Entry  Illustrated.  In  the  following  problem  the  main  features 
of  the  simplest  kind  of  single  entry  are  explained  in  detail.  The  features 
are  discussed  under  these  headings: 

1.  How  the  transactions  are  recorded. 

2.  How  the  correctness  of  postings  is  proved. 

3.  Preparing  the  financial  statement. 

4.  Method  of  calculating  net  profit. 

5.  Difference  between  net  profit  and  net  increase  in  capital. 

The  case  to  be  used  for  illustration  is  that  of  L.  E.  Osborn,  who  opened 
a  grocery  store  on  May  1,  1922,  with  the  investment  of  $3,000.00  cash.  He 
deposited  the  cash  in  the  bank,  and  made  all  disbursements  by  checks. 

On  May  1  he  purchased  on  account  from  the  General  Stationery  Com- 
pany, a  day  book  and  a  ledger  for  $8.50.  No  cash  book  has  been  used,  but 
his  check  stubs  show  his  deposits  and  payments,  being  balanced  as  each 
check  is  issued.  The  day  book  and  ledger  has  been  used  to  keep  a  record 
of  what  customers  owe  him  and  what  he  owes  to  creditors.  His  system  is, 
therefore,  that  of  pure  single  entry. 

The  following  list  of  transactions  shows  his  business  for  the  month : 

May     1.  Paid  $50.00  for  month's  rent. 

2.  Bought  store  furniture  for  $500.00  cash. 

3.  Bought  merchandise  of  W.  E.  Somers  on  account,  $1,530.00. 

4.  Bought  a  delivery  truck  for  cash,  $1,200.00. 
6.  Paid  $30.00  for  advertising. 

8.  Sold  merchandise  to  Joseph  Small  on  account,  $360.00. 

8.  Took  merchandise  home  for  personal  use,  $12.00. 

8.  Received  $450.00  from  cash  sales. 

10.  Bought  merchandise  from  Myers  Bros,  on  account,  $850.00. 

12.  Bought  merchandise  for  cash,  $15.00. 

15.  Paid  $45.00  cash  for  wages  of  clerk. 

16.  Sold  merchandise  for  cash,  $120.00. 
18.  Withdrew  cash  $25.00  for  personal  use. 

20.  Sold  merchandise  to  M.  E.  Payne  on  account,  $440.00. 

20.  Gave  promissory  note  to  W.  E.  Somers  on  account,  $200.00. 

22.  Paid  $150.00  cash  to  W.  E,  Somers  on  account. 

25.  Paid  $130.00  cash  to  Myers  Bros,  on  account. 

27.  Received  $250.00  from  M.  E.  Payne  on  account. 

30.  Took  merchandise  home  for  personal  use,  $18.00. 

30.  Paid  $45.00  cash  for  wages  of  clerk. 

30.  Paid  $8.50  on  account  with  General  Stationery  Company. 

Assignment  26,  Page  2 


SINGLE-ENTRY  JOURNAL 


DATE 

L.F. 

EXPLANATION 

DEBITS 

CREDITS 

1922 
May 

1 

1 

3 

8 

8 

10 

18 

20 

20 

22 

25 

27 

30 

30 

L.  E.  Osborn 

360 
12 

25 
440 
200 
150 
130 

18 
8 

00 
00 

00 
00 
00 
00 
00 

00 
50 

3,000 

8 

1,530 

850 
250 

00 
50 
00 

00 
00 

Opened  grocery  store  depositing  cash  in  bank. 

General  Stationery  Company 

Bought  day  book  and  ledger  on  account. 

W.  E.  Somers 

Joseph  Small 

Sold  merchandise  on  account. 

L.  E.  Osborn 

Took  merchandise  home  for  personal  use. 

Myers  Bros 

Bought  merchandise  on  account. 

L.  E.  Osborn 

M.  E.  Payne 

Sold  merchandise  on  account. 

W.  E.  Somers 

W.  E.  Somers 

Paid  on  account. 

Myers  Bros 

M.  E.  Payne  

Received  cash  to  apply  on  his  account. 

L.  E.  Osborn 

General  Stationery  Company 

Paid  on  account. 

1,343 

50 

5,638 

50 



Figure  1. — Notice  especially  that  only  one  entry  is  made  for  each  transaction.  Cash 
received  from  sales  and  cash  paid  out  for  purchases  and  expenses  are  not  entered,  be- 
cause they  do  not  affect  personal  accounts.  There  is,  of  course,  a  record  on  the  check 
stubs  of  cash  deposited  and  checks  drawn,  which  serves  in  general  the  purpose  of  a 

cash  book. 

Assignment  26,  Page  3 


It  should  be  pointed  out  here  that  sales  are  larger  to  each  customer 
than  would  be  expected  in  a  retail  store,  and  that  only  a  few  transactions 
are  given.  There  would,  of  course,  be  many  daily  sales,  but  they  have  been 
grouped  under  a  few  names  for  economy  of  space. 

On  May  31  he  took  an  inventory  of  his  merchandise,  fixtures,  and 
equipment  as  follows: 

Merchandise   $1,420.00 

Fixtures -      495.00 

Delivery  Truck 1,180.00 

1.  How  the  Transactions  Are  Recorded.  From  the  above  transactions 
only  those  that  affect  the  accounts  of  his  customers  and  creditors  will  be 
recorded  in  the  single-entry  journal  or  day  book  as  illustrated  in  Figure  1. 

It  will  be  noted  that  the  first  column  is  used  for  charges  to  personal 
accounts,  and  the  second  column  for  credits.  This  is  a  more  systematic  use 
of  the  journal  than  is  sometimes  found,  where  the  journal  is  a  memo- 
randum record  only.  Since  the  two-column  book  is  somewhat  common 
to-day,  however,  it  is  used  properly  in  this  illustration,  and  calls  merely 
for  a  classification  of  charges  and  credits  to  accounts  with  persons. 

The  entries  made  in  the  single-entry  journal  are  posted  to  the  ledger 
currently  during  the  month  of  May.  On  May  31,  therefore,  the  ledger 
appears  as  in  Figure  2. 


LEDGER  ACCOUNTS 
L.  E.  Osborn,  Capital 




DATE 

EXPLANATION 

Fol. 

V 

DEBITS 

DATE 

EXPLANATION 

Fol. 

V 

CREDITS 

1922 
May 

8 
18 
30 

Took  merchandise  home 

Withdrew  cash 

Took  merchandise  home 

12 
25 
18 

00 
00 
00 

1922 

May 

1 

Cash_^investment 

3,000 

00 

General  Stationery  Company 


1922 

May 


30 


Paid  account  in  full 


1922 

May 

20 
22 

Note 
Cash 

on 

account 

50 


1922 
May 


Bought  day  book  and 
ledger  ,-i^^ 
^2 


W.  E.  Somers 


1922 

200 

00 

May   3 

150 

00 

Merchandise  on 
account 


50 


1,530 


00 


1922 
May 


25 


Cash  on  account 


Myers  Bros. 

1922 

130 

00 

May 

10 

Merchandise  on 
account 


850 


00 


Assig^nment  26,  Page  4 


Joseph  Small 


19221 
May 


Merchandise  on 
account 


36C 


00 


1922 


M.  E.  Payne 


1922 
May 

20 

Merchandise  on 
account 

440 

m 

00 

1922 
May 

27  Cash  on  account 

2  50  00 

Figure  2. — This  ledger  enables  Mr.  Osborn  to  tell  at  any  time  how  much  each  customer 
owes  him,  and  how  much  he  owes  each  ci'editor.  His  own  account  shows  the  capital 
invested  and  the  charges  against  it  from  time  to  time.    From  it  he  determines  his  net 

claim  on  the  business. 

2.  How  the  Correctness  of  Postings  Is  Proved.  In  looking  over  the 
ledger  accounts  in  Figure  2,  you  will  see  that  if  you  take  a  trial  balance, 
as  is  ordinarily  done  in  double  entry,  the  ledger  will  not  balance.  This  is 
due  to  the  fact,  as  already  explained,  that  only  one  entry  is  made  for  each 
transaction.    We  must  have  another  method  of  proving  the  postings. 

This  other  method  is  called  "proof  of  posting."  By  this  we  mean  that 
the  total  of  all  the  debits  in  the  journal  will  equal  the  total  of  all  the  debits 
in  the  ledger.  If  these  two  totals  fail  to  agree,  then  some  amount  has 
either  not  been  posted  or  has  been  posted  incorrectly.  In  the  same  manner 
the  total  of  the  credits  in  the  journal  is  compared  with  the  total  of  the 
credits  in  the  ledger.  The  proof  of  posting  for  the  illustration  we  are 
considering  is  shovv^n  in  Figure  3. 

TEST  FOR  PPvOOF  OF  POSTING 


ACCOUNTS 


L.  E.  Osborn,  Capital.  .  . 
General  Stationery  Company 

W.  E.  Somers  

Myers  Bros 

Joseph  Small  

M.  E.  Payne 

Total  Debits 

Total  Credits  


JOURNAI 

TOTALS 

LEDGES 

TOTALS 

Debits 

Credits 

Debits 

Credits 

SI, 343 

50 

$5,638 

50 

$   55 
8 
350 
130 
360 
440 

00 
50 
00 
00 
00 
00 

33,000 

8 

1,530 

850 

25C 

00 
50 
00 
00 

00 

$1,343 

50 

$5,638 

50 

Figure  3. — ^The  totals  for  the  journal  are  taken  from  Figure  1.    As  you  will  note,  these 
totals  agree  with  the  total  debits  and  credits  in  the  ledger,  which  proves  that  the  post- 
ings were  correctly  made. 

3.  Preparing  the  Financial  Statement,  There  always  comes  a  time  in 
every  business  undertaking  when  the  management  wants  to  know  what 
its  present  worth  is,  and  whether  it  has  made  a  profit.  Altho  he  had  been 
in  business  but  one  month,  ivlr.  Osborn  wished  to  know  his  present  worth 
on  Mav  31,  1922. 


Assig:nment  26,  Page  5 


When  the  single-entry  system  is  used  the  present  worth  is  determined 
by  preparing  a  hst  of  all  the  assets  and  liabilities.  The  total  liabilities  are 
then  subtracted  from  the  total  assets,  giving  a  result  which  represents  the 
net  worth.  When  these  facts  are  properly  arranged  the  statement  is 
called  a  "financial  statement,"  which  in  appearance  is  very  much  like  the 
regular  balance  sheet.  The  method  of  preparing  the  single-entry  state- 
ment, however,  is  quite  different.  Under  double  entry  a  trial  balance  is 
first  taken,  and  then  the  balance  sheet  is  set  up  from  it.  This  cannot  be 
done  under  single  entrj^,  since  the  ledger  does  not  contain  all  the  facts. 

The  cash  balance,  for  example,  is  not  shown  in  a  separate  account  in 
the  ledger.  The  cash  as  of  May  31,  therefore,  must  be  listed  from  the 
check  book.  Any  cash  still  undeposited  in  the  store  or  in  the  office  must 
be  counted  and  added  to  the  check-book  balance.  The  amount  of  mer- 
chandise on  hand  is  obtained  by  taking  an  inventory.  The  store  fixtures 
and  other  equipment  are  listed  and  revalued.  Allowance  is  made  for 
proper  depreciation,  and  the  net  amounts  listed  in  the  financial  statement. 
In  making  such  an  appraisal,  the  judgment  of  the  proprietor  is,  of  course, 
depended  upon. 

The  amounts  for  Accounts  Receivable  and  Accounts  Payable  are  ob- 
tained by  totaling  the  customers'  and  creditors*  accounts,  respectively. 
The  amount  for  Notes  Receivable  is  determined  by  listing  the  actual  notes 
on  hand.  The  Notes  Payable  amount  is  taken  from  a  notes  payable  regis- 
ter or  other  memorandums  which  show  such  information.  It  may  be  that 
the  memory  of  the  proprietor,  or  reference  at  the  bank,  etc.,  will  have  to 
be  depended  on  entirely. 

This  procedure  of  preparing  the  single-entry  financial  statement  is  usu- 
ally called  the  "inventory  method."  It  involves  in  some  cases  a  consider- 
able amount  of  searching  for  facts  in  order  that  all  assets  and  liabilities 
be  included.  The  financial  statement  of  Mr.  Osborn  for  May  31,  as  given 
in  Figure  4,  was  prepared  by  this  method. 


L.  E.  Osborn 
FINANCIAL  STATEMENT,  May  31,  1922 


Assets 

Cash $1,621.50 

Merchandise 1,420.00 

Office  Furniture  495.00 

Delivery  Equipment  1,180.00 

Customers  Accounts; 

Joseph  Small 360.00 

W.  W.  Payne 190.00 


$5,266.50 


Liabilities  and  Capital 
Creditors  Accounts: 

W.  E.  Somers $1,180.00 

Myers  Bros 720.00 

Notes  Payable  (V .   E.  Somers)  .  .    200.00 
Capital 3,166.50 


$5,266.50 


Figure  4. — Look  over  the  transactions  of  Mr.  Osborn  and  see  how  the  asset  and  liabil- 
ity amounts  are  determined.  For  example,  how  is  the  cash  balance  of  $1,621.50  ob- 
tained? Account  for  each  of  the  other  amounts  by  a  similar  analysis  of  the  transac- 
tions. In  this  way  you  will  come  to  understand  fully  what  is  meant  by  the  inventory 
method  of  preparing  the  financial  statement  under  single  entry. 

4.    Method  of  Calculating  Net  Profit.     Now  that  we  have  determined 
the  capital  of  Mr.  Osborn  on  May  31,  1922,  we  can  very  easily  calculate  the 


Assignment  26,  Page  6 


net  profit  for  May.  Since  his  capital  on  May  31  is  larger  than  it  was  on 
May  1,  the  difference  will  represent  the  net  income  for  the  period.  This 
may  be  calculated  in  two  ways,  as  illustrated  in  Figures  5  and  6. 


L.  E.  Osborn 
CALCULATION  OF  NET  PROFIT,  for  May, 

1922 

$3,166.50 

2,945.00 

$  221.50 

L.  E.  Osborn,  Capital  May  31,  1922  

Capital  May  1  1922                 

.  $3,000.00 

Deduct  Charges  and  Withdrawals  for  May 

Net  Profit  

55.00 

Calculation  of  Net  Profit — Method  1 

Figure  5. — Notice  that  the  charges  to  Mr.  Osborn's  personal  account  are  deducted  from 
his  capital  at  the  beginning  of  the  period  to  arrive  at  his  net  investment.  This  is  then 
subtracted  from  his  net  worth  May  31,  which  gives  the  net  increase  in  capital  for  the 
period.  It  should  be  emphasized  in  this  connection  that  these  charges  are  not  expenses. 
They  are  direct  charges  against  capital. 


L.  E.  Osborn 
CALCULATION  OP  NET  PROFIT,  for  May, 

1922 

166.50 
,000.00 

L.  E.  Osborn,  Capital  May  31,  1922   

Capital  May  1,  1922  

.  .  .  .  $3 
.  .  .  .  3 

Net  Increase  in  Capital  

.  .  .  .  $ 

166.50 
55.00 

Add  Charges  and  Withdrawals  during  May  .' 

Net  Profit  

.  .  .  .  $ 

221.50 

Calculation  of  Net  Profit — Method  2 

Figure  6. — This  method  of  figuring  the  net  profit  differs  from  that  shown  in  Figure  5 

only  in  the  way  of  handling  charges  against  the  proprietor.    It  illustrates  more  clearlj'' 

the  distinction  between  the  net  increase  in  capital  and  the  net  profit. 

After  obtaining  the  net  profit  of  $221.50,  the  amount  is  credited  to 
L.  E.  Osborn's  Capital  Account. 

5.    Difference  Between  Net  Profit  and  Net  Increase  in  Capital.     The 

above  calculation  of  profits  shows  a  net  profit  for  the  month  amounting  to 
$221.50,  while  the  net  increase  in  capital  has  been  only  $166.50.  The  dif- 
ference, of  $55.00,  is  the  total  charges  against  the  proprietor,  which  altho 
they  decrease  capital,  are  not  expenses  for  the  period.  This  distinction 
should  be  clearly  fixed  in  your  mind. 

The  expression  "increase  in  capital,"  means  an  increase  in  the  claim  of 
the  proprietor  against  the  net  assets,  regardless  of  how  this  increase  came 
about.  It  may  have  resulted  from  the  operations  of  the  business,  or  it  may 
come  from  some  purely  personal  transactions  entirely  outside  the  scope 
of  the  business.  For  instance,  if  the  proprietor  receives  a  legacy  of  $1,000.00 
and  immediately  turns  it  over  to  the  business,  such  addition  of  cash  in- 
creases his  capital  but  it  cannot  be  considered  as  a  profit.  Similarly,  if 
the  proprietor  withdraws  cash  for  some  personal  purpose,  such  as  $200.00 

Assignment  26,  Page  7 


for  a  pleasure  trip  for  his  family,  he  reduces  his  claim  against  the  assets 
but  he  does  not  reduce  his  profits  from  the  business.  It  would  not  be  fair 
to  his  managerial  ability  to  call  such  a  decrease  in  capital  a  loss  or  expense 
of  the  business. 

Likewise,  when  merchandise  is  withdrawn  for  the  proprietor's  own 
use,  it  should  be  charged  to  him  and  considered  a  reduction  in  capital. 
Otherwise  it  merely  tends  to  decrease  his  inventory  and  add  to  the  cost  of 
doing  business,  and  is  a  business  loss.  For  this  reason  all  withdrawals  of 
cash  or  other  personal  charges  to  the  proprietor  are  added  to  the  net 
increase  of  capital  to  determine  the  actual  net  profit  from  operations. 

This  distinction  between  net  increase  in  capital  and  net  profit  may  be 
expressed  in  the  following  equation: 


Capital    at 
End  of  Period 

— 

Capital  at 
Beginning  of  Period 

= 

Net  Increase 
in  Capital 

Net  Increase         _[_ 
in  Capital 

Withdrawals 

— 

Additional 
Contributions 

= 

Net 
Profit 

From  this  discussion  it  is  clear  that,  if  property  is  added  or  withdrawn 
thru  transactions  other  than  those  resulting  from  business  operations,  it 
must  be  either  a  subtraction  from  or  an  addition  to  the  increase  in  capital 
in  calculating  net  profit.  » 

When  the  capital  at  the  close  of  the  period  is  less  than  at  the  beginning, 
it  means  a  decrease  of  capital,  but  this  does  not  necessarily  mean  a  loss 
from  business  dealings.  It  may  be  that  operations  resulted  in  a  profit,  but 
that  the  proprietor  had  withdrawn  enough  property  to  more  than  offset 
the  earnings  for  the  period. 

VARIOUS  METHODS  OF  KEEPING  SINGLE-ENTRY  BOOKS 

In  its  practical  application,  single  entry  is  seldom  found  in  the  precise 
form,  as  used  by  Mr.  Osborn.  This  simple  system  of  day  book  and  ledger 
containing  personal  accounts  is  very  frequently  extended  and  elaborated. 
Sometimes  a  summary  of  sales,  and  certain  expense  analyses,  are  kept  as 
merely  memoranda  records.  In  some  instances  one  may  even  find  accounts 
or  records  with  the  more  important  classes  of  property.  The  m.ost  com- 
mon extension  is  the  use  by  some  proprietors  of  a  regular  cash  book  in 
addition  to  the  journal.    The  cash  book  makes  possible  two  things: 

1.  It  provides  a  safeguard  on  cash.  The  Cash  Account  and  bank  balance  can  then 
be  verified  by  the  record  in  the  cash  book. 

2.  It  gives  a  basis  for  analyzing  expenses  and  income  in  the  preparation  of  a  profit 
and  loss  statement  from  single-entry  books.  Such  an  analysis  is  especially  im- 
portant in  rendering  an  income-tax  return. 

When  a  cash  book  is  used,  postings  for  collections  from  customers  and 
for  remittances  to  creditors  should  be  made  from  it.  This  relieves  the  day 
book  or  journal  of  such  entries.  A  cash  book,  suitable  for  the  business  of 
Mr.  Osborn,  is  illustrated  in  Figure  7. 


Assignment  26,  Page  8 


CASH  BOOK 

CUSTO- 

TOTAL 
RECEIPTS 

CRED- 

TOTAL 

DATE 

L.  F. 

lEXPLANATION 

MERS' 
CR. 

DATE 

L.  F. 

EXPLANATION 

ITORS' 
DR. 

DISBURSE- 
MENTS 

1922 

1922 

May 

1 

8 

16 

L.  E.  Osborn 
Cash  Sales 
Cash  Sales 

3,000 
450 
120 

00 
00 
00 

May 

1 
2 

Rent 

Office  Furni- 
ture 

50 
500 

00 
00 

27 

M.  E.  Payne 

250 

00 

250 

00 

4 

6 
12 
15 
18 
22 
25 
30 
30 

Delivery 
Truck 
Advertising 
Purchases 
Wages — Clerk 
L.  E.  Osborn 
W.  E.  Somers 
Myers  Bros. 
Wages — Clerk 
General  Sta- 
tionery Co. 

150 

130 

00 
00 

1,200 
30 
15 
45 
25 
150 
130 
45 

8 

00 
00 
00 
00 
00 
00 
00 
00 

50 

2,198 

50 

June 

1 

Balance.  ,  . 

31 

Balance  .  ,  . 

1,621 

50 

3,820 

00 

3,820 

00 

1,621 

50 

Figure  7.— -This  simple  cash  book  would  be  adequate  for  a  single-entry   systen'i.  The 

entries  that  are  to  be  posted  are  placed  in  the  columns  headed  Customers'  Credit  and 

Creditors'  Debit.  Observe  how  an  an.Tlysis  of  expenses  and  income  can  be  made  for  the 

profit  and  loss  statement,  as  shown  in  Figure  8. 


PROF 

IT 

AND 

T 

LOSS 

E.  Osborn 
STATEMENT  for 

May, 

1922 

.$1 

,370 
945 

00 
00 

Sales  

Cost  of  Goods  Sold 

Purchases  .  .  . 

Less  Withdrawal 

Less  Inventory, 

Cost  of  Goods  Sold 

Gross  Profit 
Operating  Expenses 

Wages  

Advertising  .  . 
Depreciation  of 
Depreciation  of 

Rent 

Books  of  Account 

Net  Profit  .... 

May  31 

Furnitur 
Delivery 

'E( 

.  $2 

395 
30 

00 
00 

$2 
.  1 

365 
420 

00 
00 

.  S 

90 
30 

5 
20 
50 

8 

00 
00 
00 
00 
00 
50 

s 

425 
203 

00 
DO 

lu 

pment 

$ 

221 

50 

Profit  and  Loss  Statement 

Figure  8. — This  statement  is  very  similar  to  the  regular  profit  and  loss  statement  ob- 
tained from  a  trial  balance.  You  will  note  how  certain  of  the  facts  come  directly  from 
the  cash  book.    The  sales  and  purchases  are  arrived  at  by  the  method  explained  in  the 

discussion. 


Assignment  26,  Page  9 


A  Profit  and  Loss  Statement  Under  Single  Entry.  The  accountant  is 
frequently  called  upon  to  prepare  a  profit  and  loss  statement  from  single- 
entry  books.  Especially  is  this  necessary  when  income-tax  returns  must 
be  prepared.  When  a  cash  book  is  used,  the  profit  and  loss  statement  can 
be  set  up  partly  from  the  cash  book.  If  it  is  not  used,  check  stubs  are  used, 
along  with  other  memorandums,  receipts,  etc. 

In  the  case  of  Mr.  Osborn's  business,  the  profit  and  loss  statement 
would  appear  as  in  Figure  8. 

The  problem  of  determining  the  amounts  of  sales  and  purchases  from 
a  single-entry  set  of  books  is  accomplished  by  working  backward  from  the 
amounts  due  from  customers  and  the  amounts  owed  to  creditors.  The  fol- 
lowing method  shows  how  this  is  done. 

Calculation  of  Purchases  from  Creditors'  Accounts: 
Amount  Owed  to  trade  creditors,  end  of  period: 

On  Open  Account  $1,900.00 

By  Note  Payable  200.00 

Total   $2,100.00 

Add  Cash  Payments  to  Creditors  during  period 280.00 

Cash  Purchases  during  period  15.00 

Total   $2,395.00 

Deduct  Amount  Owed,  beginning  of  period  None 

Total  Purchases  for  period  $2,395.00 

Calculation  of  Sales  from  Customers'  Accounts: 

Amount  due  from  customers,  on  open  account,  end  of  period $  550.00 

Add  Collections  from  Customers  during  period  250.00 

Cash  Sales  during  period  570.00 

Total $1,370.00 

Deduct  Amount  Outstanding,  beginning  of  period  None 

Total  Sales  for  period  $1,370.00 


Note  especially  in  the  above  calculations  that  there  were  no  balances  at 
the  beginning  of  the  period.  This  is  due  to  the  fact  that  Mr.  Osborn 
began  business  on  May  1,  the  beginning  date  of  the  period.  In  the  calcula- 
tion of  sales,  notes  receivable  are  not  considered  in  this  case,  because  no 
notes  were  received  from  customers  on  account. 

Single  Entry  Compared  with  Double  Entry.  Now  that  you  are  familiar 
with  the  single-entry  system,  both  in  its  simple  and  modified  forms,  you 
are  in  a  position  to  consider  its  merits  and  disadvantages  when  compared 
with  double  entry. 

The  chief  merit  for  single  entry  is  that  it  reduces  the  bookkeeping 
work  to  a  minimum.  This  is,  of  course,  desirable  in  small  businesses, 
where  the  proprietor  is  very  often  his  own  bookkeeper;  at  least  his  own 
manager. 

As  the  volume  of  business  grows  and  certain  duties  are  delegated  to 
assistants,  however,  good  management  requires  a  more  accurate  check  on 
operations.  The  manager  needs  a  better  analysis  of  expenses,  a  calculation 

Assignment  26,  Page  10 


of  turnover,  and  greater  control  of  every  phase  of  the  business.     Single 
entry  is  then  found  wanting,  because : 

1.  It  does  not  provide  an  adequate  check  on  purchases  and  sales. 

2.  It  does  not  control  sufficiently  the  accuracy  of  information. 

3.  It  does  not  furnish  without  special  analysis  complete  financial  reports. 

Double  entry,  on  the  other  hand,  does  meet  these  necessary  require- 
ments. That  is  why  business  houses  are  gradually  adopting  the  double 
entry  method.  This  often  means  a  change  from  single  to  double  entry  and 
an  accountant  is  usually  called  in  to  make  the  change. 

Changing  from  Single  Entry  to  Double  Entry.  The  task  of  changing 
a  single-entry  set  of  books  to  double  entry  may  mean  one  of  two  things. 
The  change  may  be  made  as  of  a  given  date,  in  which  case  new  books  are 
opened  on  the  double-entry  plan.  In  this  case  no  attempt  is  made  to 
change  any  part  of  the  entries  of  the  preceding  period. 

Sometimes  the  change  includes  recording  in  the  old  books  the  infor- 
mation which  was  omitted  under  the  single-entry  system.  This  procedure 
necessitates  the  rewriting  to  a  certain  extent  of  past  records  and  the  creat- 
ing of  nominal  and  property  accounts  in  the  ledger. 

Both  of  these  methods  are  illustrated  and  explained  on  the  following 
pages. 

Method  One.  Change  the  books  of  L.  E.  Osborn  from  single  to  double 
entry,  beginning  June  1,  1922. 

The  procedure  in  this  case  is  simple.  An  entry  is  made  opening  the 
double-entry  set  of  books  with  the  financial  statement  as  of  that  date. 
If  the  same  ledger  formerly  used  for  single  entry  is  to  be  continued,  the 
opening  entry  must  be  made  so  as  to  place  on  the  ledger  only  the  new 
accounts. 

The  entry  for  changing  the  books  of  Mr.  Osborn  would  be  as  follows : 


JOURNAL 


DATE 


L.F. 


EXPLANATION 


DEBITS 


CREDITS 


1922 

June 


I 


Cash 

Merchandise  Inventory  

Office  Furniture 

Delivery  Equipment 

Joseph  Small 

M.  E.  Payne  

W.  E.  Somers  

Myers  Bros 

Notes  Payable   

L.  E.  Osborn,  Capital 

To  put  on  the  ledger  additional  accounts,  as  per  fi- 
nancial statement  of  June  1,  1922,  for  changing  single 
entry  books  to  double  entry. 


1,621 

1,420 

495 

1,180 

360 

190 


1,180 
720 
200 

3,166 


Assignment  26,  Page  11 


Since  the  accounts  of  Joseph  Small,  M.  E.  Payne,  W.  E.  Somers,  Myers 
Bros.,  and  L.  E.  Osborn,  Capital,  are  already  contained  in  the  ledger,  these 
items  are  checked  in  the  folio  column,  so  that  they  will  not  be  posted  again. 
After  posting  the  other  items,  the  ledger  would  be  in  balance.  It  is  then 
ready  to  receive  entries  from  the  regular  books  of  original  entry  in  the 
same  way,  as  if  the  books  had  always  been  kept  by  double  entry. 

If  the  old  ledger  is  not  to  be  continued,  the  complete  entry  would,  of 
course,  be  posted  to  a  new  ledger.  The  old  ledger  would  then  be  closed 
by  ruling  off  the  balances  transferred  to  the  new  ledger. 

Method  Two.  Change  the  books  of  L.  E.  Osborn  from  single  entry  to 
double  entry  from  May  1,  1922. 

This  problem  is  slightly  longer  than  the  preceding  one,  but  involves 
no  very  difficult  principles.  It  requires  the  building  up  of  the  necessary 
property  and  nominal  accounts  in  the  ledger  that  have  not  been  used  under 
the  single-entry  system. 

The  procedure  is  given  below: 

1.  Post  totals  of  cash  book  to  Cash  Account:  Receipts  (Debited) 
$3,820.00;  Disbursements   (Credited)   $2,198.50. 

2.  From  the  cash  disbursements  side  of  the  cash  book  debit  the  follow- 
ing: Rent  Account,  $50.00 ;  Furniture  and  Fixture  Account,  $500.00 ; 
Delivery  Equipment  Account,  $1,200.00;  Advertising  Expense  Ac- 
count, $30.00 ;  Purchases  Account,  $15.00 ;  Clerk's  Wages,  $90.00. 

3.  From  the  cash  receipts  side  of  the  cash  book  credit  the  following: 
Sales  Account,  $570.00. 

4.  From  the  accounts  with  customers  and  creditors,  already  in  use, 
information  is  summarized  and  posted  as  follows:  Debits:  Pur- 
chases, $2,395.00;  Office  Supplies,  $8.50;  Credits:  Sales,  $1,370.00; 
Purchases,  $30.00 ;  Notes  Payable,  $200.00. 

5.  Make  a  journal  entry  for  depreciation  of  $5.00  on  Fixtures,  and 
$20.00  on  Delivery  "^  Equipment.  Debit:  Depreciation,  $25.00; 
Credit:   Reserve  for  Depreciation,  $25.00. 

A  trial  balance  can  then  be  taken  of  the  ledger  and  a  profit  and  loss 
statement  prepared  which  would  agree  with  the  one  shown  in  Figure  8. 

It  would  be  well  to  set  up  the  solution  for  the  above  problem  in  order 
that  you  may  fully  understand  how  to  proceed.  You  are  not  required, 
however,  to  send  in  your  solution. 


MAIN  POINTS  IN  THIS  ASSIGNMENT 

In  this  assignment  you  have  become  familiar  with  the  main  features 
of  the  single-entry  method.  The  following  summary  will  enable  you  to 
make  a  brief  review  of  its  essential  principles. 

Assignment  26,  Page  12 


First:    Note  the  chief  differences  between  the  two  methods. 


Single  Entry 

1.  Only  transactions  involving  personal 
accounts  are  recorded  showing  debit 
or  credit. 

2.  Information  obtained  is  restricted 
since  no  nominal  or  property  accounts 
are  used. 

3.  Accounts  are  kept  only  with  custom- 
ers, creditors,  and  the  proprietor. 

4.  Proof  of  posting  used  to  verify  the 
debits  and  credits  in  single  entry 
ledger. 

5.  Financial  statement  must  be  con- 
structed from  inventories. 

6.  Profits  from  operations  are  deter- 
mined by  a  comparison  of  beginning 
and  ending  net  worth. 


Double  Entry 

1.  Every  transaction  is  recorded  show- 
ing both  debit  and  credit  elements. 

2.  Information  is  obtained  in  detail, 
since  all  real  and  nominal  accounts 
are  used. 

3.  Accounts  are  kept  with  all  values,  in- 
cluding property,  operations,  and  per- 
sonal claims. 

4.  Trial  balance  used  to  verify  the  debits 
and  credits  in  double  entry  ledger. 

5.  Financial  statement  is  an  actual  bal- 
ance sheet  of  the  ledger  after  being 
properly  adjusted  and  closed. 

6.  Profits  from  operations  can  be  proved 
by  a  statement  of  profit  and  loss, 
giving  the  causes  for  increase  or  de- 
crease in  net  worth. 


Second:    Recall  the  illustrative  problems. 

1.  The  first  problem  explained  the  operation  of  single  entry.    The 
steps  shown  were: 

(a)  How  ■  transactions  are  recorded. 

(b)  How  postings  are  proved. 

(c)  How  financial  statement  is  prepared. 

(d)  How  profit  for  the  period  is  calculated. 

2.  The  second  problem  explained  how  to  change  from  single  entry 
to  double  entry: 

(a)  When  the  books  are  changed,  as  of  a  given  date. 

(b)  When  the  double-entry  record  is  built  up  from  some  pre- 
vious date. 

A  journal  entry  is  necessary  to  open  the  double-entry  ledger.  This 
entry  is  made  from  the  financial  statement.  Only  those  accounts 
which  are  not  already  in  the  ledger  are  set  up  if  the  old  ledger  is 
continued. 

Third:  A  clear  distinction  was  made  between  net  increase  in  capital 
and  net  profit. 

Net  Increase  in  capital  is  determined  by  deducting  the  capital  at  the 
beginning  from  the  capital  at  the  end. , 

Net  Profit  is  determined  by  subtracting  additions  and  adding  with- 
drawals of  the  proprietor  to  the  increase  in  capital. 

Fourth :    Various  forms  of  single  entry. 

1.  Simplest  form — a  day  booR  or  single-entry  journal  is  the  only 
book  of  original  entry. 

2.  Modified  form — a  cash  book  and  journal  and  sometimes  other 
memoranda  records  are  kept  in  addition  to  the  day  book. 


Assignment  26,  Page  13 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  26 

The  following  problems  are  typical  of  actual  situations  calling  for  a 
thoro  understanding  of  the  principles  of  single  entry.  In  this  solution  you 
will  apply  the  methods  which  have  been  illustrated  in  the  assignment. 
Prepare  your  work  in  accordance  with  the  principles  explained. 

1.  R.  M.  Carrier  is  the  owner  of  a  small  retail  jewelry  store.  He  oper- 
ates the  store  himself  with  the  assistance  of  two  clerks  and  keeps  his  rec- 
ords by  single  entry.  On  December  31,  1922,  he  prepared  a  statement  of 
his  financial  condition  and  found  that  his  net  worth  was  $8,700.00.  He 
compared  this  with  his  net  worth,  as  shown  by  his  financial  statement  of 
December  31, 1921.  This  comparison  showed  that  his  capital  had  increased 
$1,500.00. 

His  personal  account  showed  that  during  the  year  the  following  with- 
drawals and  additions  had  been  made: 

April    6.— Withdrawal  of  $175.00 

April  29.— Withdrawal  of  $251.00 

July  24. — Additional  investment  of  $500.00 

Oct.      5.— Withdrawal  of  $65.00 

Nov.  30.— Withdrawal  of  $100.00 

Dec.   15.— Withdrawal  of  $68.00 

Calculate  and  show  in  statement  form  Mr.  Carrier's  net  profit  for  the 
year  ended  December  31,  1922. 

2.  Elmer  Deakin  keeps  his  books  by  single  entry,  but  in  addition  uses 
a  cash  book  in  order  to  safeguard  his  cash.  His  transactions  for  January, 
1922,  are  as  follows: 

Jan.l,  Following  were  the  assets  at  the  beginning  of  business  to-day:  Cash  on  hand 
$2,000.00,  store  and  lot  valued  at  $4,000.00,  George  Wilson's  note,  dated  Decem- 
ber 10,  1921,  for  60  days,  $500.00.     (Disregard  accrued  interest.) 

2,  Paid  $260.00  for  office  furniture. 

2,  Bought  of  W.  R.  Story  for  cash,  merchandise  $560.00. 

2,  Paid  A.  R.  Deneen  cash  for  sundry  repairs,  $50.00. 

4,  Sold  Edmund  White,  for  cash,  merchandise,  $320.00. 

5,  Bought  of  James  Selden,  on  account,  merchandise,  $850.00. 
5,  Paid  J.  D.  Russell  cash  for  office  stationery,  $12.25. 

9,  Discounted  George  Wilson's  note  at  6  per  cent,  and  received  cash  for  the  pro- 
ceeds. 
12,  Sold  Howard  Stetson,  on  account,  merchandise,  $212.00. 
12,  Gave  James  Selden  a  check  for  $425.00. 
15,  Wages  for  clerk,  paid  in  cash,  $30.00. 
21,  Received  a  30-day  note  from  Howard  Stetson,  $212.00. 

25,  Gave  James  Selden  a  60-day  note  for  $425.00. 

26,  Paid  Phil  Glover  $560.00  for  an  auto  delivery  truck. 

27,  Took  merchandise  home  valued  at  $30.00  cost  price. 
30,  Took  $50.00  cash  for  personal  use. 

30,  Wages  of  clerk,  paid  in  cash,  $30.00. 

31,  Merchandise  on  hand  valued  at  $1,200.00,  furniture  and  fixtures  valued  at  $240.00. 
Other  assets  have  not  depreciated. 

Assignment  26,  Page  14 


(a)  Record  the  necessary  transactions  in  a  cash  book  and  journal. 

(b)  Post  all  personal  accounts. 

(c)  Set  up  a  proof  of  posting. 

(d)  Prepare  a  financial  statement. 

(e)  Prepare  a  statement  showing  the  calculation  of  net  profit  for  the 
month. 

3.  John  Smith,  who  has  been  in  business  for  one  year  as  a  merchant, 
has  kept  his  accounts  by  single  entry.  On  December  31,  1922,  you  are 
asked  to  open  a  double-entry  set  of  books  for  him.  His  records  show  the 
following  facts: 

John  Smith  (original  investment)  credit  balance  $5,000.00 

Accounts  Receivable  listed  2,000.00 

Accounts  Payable  listed  2,500.00 

He  also  submits  the  following  inventory,  which  is  accepted  as  accurate : 

Cash $1,626.00 

Merchandise  4,800.00 

Notes  Receivable 1,992.00 

Accounts  Receivable  (as  per  books) 2,000.00 

Total  Assets  $10,418.00 

Notes  Payable  $1,641.52 

Accounts  Payable  (as  per  books)  2,500.00 

Total  Liabilities 4,141.52 

Balance:  Net  Worth $6,276.48 

Represented  by 

John  Smith  (investment  as  per  books) $  5,000.00 

Profit  for  the  year 1,276.48 

—  $6,276.48 


You  are  asked  to  show  in  correct  form  the  compound  journal  entry 
which  would  change  John  Smith's  books  from  single  to  double  entry.  The 
personal  account  items,  as  you  will  notice,  are  already  listed  in  the  ledger, 
but  in  order  to  have  a  complete  journal  entry  they  should  be  shown  in  the 
opening  entry  also. 

4.  Frank  Zeller  owns  and  operates  a  store.  He  has  kept  his  books 
according  to  the  single-entry  method.  You  are  given  the  following  list  of 
accounts.  Accounts  Receivable,  Accounts  Payable,  and  Capital  are  already 
in  the  ledger. 

Jan.  1,  1922   Dec.  31,  1922 

Accounts  Payable $  7,500.00  $9,750.00 

Accounts  Receivable  26,500.00  36,000.00 

Cash— Overdraft  3,700.00 

Prank  Zeller,  Capital  34,500.00 

Furniture  and  Fixtures 700.00  700.00 

Merchandise  Inventory  8,500.00  9,500.00 

Land   2,000.00  2,000.00 

Building  8,000.00  8,000.00 

Assignment  26,  Page  15 


A  summary  of  the  cash  book  for  the  year  shows : 

From  Customers  $38,000.00 

Capital  Paid  in  (additional)  5,500.00 

Disbursements: 

Accounts  Payable  29,525.00 

Administration  Expense 2,000.00 

Selling  Expense 2,500.00 

Delivery  Expense  500.00 

Wages 2,790.00 

Proprietor's  Withdrawals 1,500.00 

Set  up  the  following  depreciation : 

2  per  cent  Depreciation  on  Buildings 
5  per  cent  Depreciation  on  Furniture  and  Fixtures 

5  per  cent  for  Bad  Debts  "Reserve    (based  on   Accounts  Receivable  balance, 
Dec.  31,  1922) 

From  the  above  facts  you  are  to  prepare: 

(a)  The  necessary  entries  to  bring  all  facts  into  the  ledger. 

(b)  A  trial  balance  at  December  31,  1922,  before  closing. 

(c)  A  profit  and  loss  statement. 

(d)  A  balance  sheet. 

From  the  cash  book  summary  you  will  determine  the  nominal  accounts, 
and  the  cash  balance  at  December  31,  taking  into  consideration  the  con- 
dition of  the  Cash  Account  at  January  1.  Calculate  purchases  and  sales 
as  explained  in  the  assignment. 

You  are  asked  to  send  in  solutions  for  all  the  above  problems  for  criti- 
cism and  grading. 


Assignment  26,  Page  16 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  27 

ACCOUNTING  FOR  NON-TRADING 
CONCERNS 


BUSINESS  is  being  done  more  and  more  on  a 
scientific  basis.  The  business  man  who  is  not 
in  possession  of  all  the  facts  relating  to  his  busi- 
aess  at  all  times,  stands  very  little  chance  of  being 
successful.  In  most  businesses  it  is  the  accounting 
department  which  is  relied  upon  to  furnish  these 
facts. 

J.  G.  KISSINGER 

President,  Milwaukee  Association  of  Commerce 


LaSalle  Extension  University 

Chicago 


NHA-27 
(12-152) 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


ACCOUNTING  PROCEDURE  FOR 
NONTRADING  CONCERNS 

If  you  were  to  classify  the  business  houses  of  your  own  community,  you 
would  find  that  most  of  them  are  engaged  in  one  of  the  following  activities : 

1.  Merchandising — that  is,  they  buy  and  sell  merchandise. 

2.  Manufacturing — that  is,  they  make  and  sell  some  commodity. 

The  accounting  procedure  for  both  these  types  of  business  has  been 
explamed  in  the  preceding  assignments. 

While  merchandising  and  manufacturing  enterprises  differ  from  each 
other  in  certain  respects,  nevertheless,  they  have  one  thing  in  common, 
that  is,  they  both  sell  some  material  commodity  for  profit. 

Opposed  to  these  two  types  of  business  activity  is  the  business  or 
institution  that  does  not  sell  commodities.  Such  businesses  are  usually 
referred  to  as  nontrading  concerns. 

Nontrading  Concerns  Sell  Services.  Nontrading  concerns  differ  from  all 
other  types  of  business  in  that  they  render  services  instead  of  selling  com- 
modities. Take,  for  example,  the  business  of  professional  men.  Lawyers, 
doctors,  dentists,  architects,  engineers,  and  accountants  sell  their  services. 
Their  income  is  not  obtained  from  the  sale  of  material  commodities,  but 
from  the  performance  of  some  service  for  their  clients.  Concerns  that 
might  also  be  mentioned  as  illustrations  of  nontrading  businesses  are  public 
utilities,  commercial  agencies,  financial  houses,  educational  institutions, 
fraternal  organizations,  trade  associations,  religious  societies,  etc.  Such 
organizations  are  engaged  in  rendering  some  service. 

Two  Kinds  of  Nontrading  Concerns.  All  nontrading  concerns  are  not 
alike,  however,  except  in  the  fact  that  they  are  intended  to  sell  or  render 
service.  They  should  be  further  divided,  according  to  their  main  purpose 
and  method  of  operation,  as  follows : 

1.  Concerns  that  are  conducted  for  profit. 

2.  Concerns  that  are  not  conducted  for  profit. 

NHA-27 
(12-1) 

Copyright,  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 

Printed  in  U.S.A. 


To  bring  out  this  distinction  more  clearly,  nontrading  concerns  are 
classified  into  two  groups,  as  follows: 


NOT  FOR  PROFIT 

Clubs 

Social 

Commercial 

Athletic 
Fraternal  Organizations 
Trade  Associations 
Religious  Societies 
Educational 

Colleges 

Universities 
Charitable 

Hospitals 

Asylums 

Orphanages 


FOR  PROFIT 
Professional 

Lawyers 

Doctors 

Dentists 

Architects 

Engineers 

Accountants 
Public  Service 

Telephone 

Street  Railways 

Gas  and  Electric  Companies 
Commercial  Organizations 

Advertising  Agencies 

Detective  Agencies 

Employment  Agencies 

Hotels 
Financial 

Banks 

Brokers 

Insurance  Companies 

Investment  Houses 

Building  and  Loan  Associations 
Educational 

Business  Colleges 

Private  Schools 

All  these  concerns  require  good  accounting  procedure.  In  some  cases 
the  records  will  be  much  simpler  than  in  others,  depending,  of  course,  upon 
the  nature  of  the  operations.  The  accountant  is  expected  to  provide  appro- 
priate records  for  the  nontrading  concerns  with  as  great  care  as  he  would 
for  trading  or  manufacturing  concerns.  Moreover,  members  of  clubs, 
churches,  societies,  and  other  institutions,  who  are  in  charge  of  the  records, 
are  interested  in  being  able  to  provide  accurate  accounts  for  their  organiza- 
tions, so  that  good  management  can  be  obtained. 

Special  treatment  of  such  nontrading  concerns  as  banks,  insurance  com- 
panies, building  and  loan  associations,  railroads,  and  other  public  utility 
concerns  cannot  be  given  at  this  time.  Such  businesses  are  subject  to 
supervision,  and  their  accounts  are  usually  made  to  comply  with  the  regula- 
tions of  some  state  or  federal  administrative  body. 

Generally  speaking,  accounts,  transactions,  books,  and  statements 
employed  in  trading  concerns  are  also  used  in  nontrading  concerns.  More- 
over, nontrading  businesses  apply  many  of  the  accounting  principles  that 
are  applicable  to  trading  concerns. 

Special  Accoimting  Features  in  Nontrading  Concerns.  There  are  a  few 
ways,  however,  in  which  the  accounting  procedure  of  a  nontrading  concern 


Assignment  27,  Page  2 


differs  from  that  of  a  trading  concern.  These  differences  are  caused  largely 
by  the  difference  in  the  character  of  the  transactions,  the  purpose  of  the 
organization,  and  the  nature  of  the  ownership.  The  accountant,  in  dealing 
with  the  accounts  of  a  nontrading  concern,  follows  the  same  plan  as  in  any 
other  statistical  investigation  in  so  far  as  the  collection,  summarization, 
and  interpretation  of  results  are  concerned.  He  bears  in  mind,  however, 
that  in  the  statements  prepared,  the  objects  of  the  organization  are  dif- 
ferent and  the  owners  look  for  a  different  type  of  interpretation  than  in  a 
trading  concern. 

More  specifically,  you  will  find  that  the  treatment  of  the  ordinary  asset 
and  liability  accounts  is  the  same  under  either  type;  also,  that  the  same 
rules  govern  the  debiting  and  crediting  of  the  ordinary  nominal  accounts. 
This  statement  might  lead  you  to  conclude  that  the  only  difference  in  the 
accounts  appears  in  the  Capital  or  Ownership  Account.  It  is  true  that  a 
fundamental  difference  does  exist  in  the  Capital  Account  of  concerns  not 
conducted  for  profit,  but  there  is  a  difference  also  in  the  nominal  accounts 
used.  The  nontrading  concerns  have  no  Sales  Account,  and  no  accounts 
that  ordinarily  appear  in  the  trading  section  of  a  profit  and  loss  and  income 
statement,  such  as  Purchases  of  Merchandise,  Freight,  Inventory,  Cartage, 
etc.  In  place  of  the  Sales  Account,  the  professional  firm  has  a  Fees  Account, 
the  charitable  institution  a  Donation,  Legacy,  or  similar  account,  the 
educational  institution,  a  Tuition  Account,  or  Income  Appropriation,  and 
the  club,  a  Dues  Account. 

ACCOUNTING  PROCEDURE  FOR  NONTRADING  CONCERNS 
OPERATING  FOR  PROFIT 

In  considering  the  accounting  procedure  for  nontrading  concerns  that 
operate  for  profit,  special  attention  should  be  given  to  the  books  that  are 
used  and  to  the  classification  of  the  accounts  in  the  ledger  of  certain  typical 
cases.    The  books  of  such  businesses  usually  consist  of  the  following: 

Journal — for  noncash  transactions. 

Cash  book — for  cash  transactions. 

Ledger. 

Clients,  guests,  or  membership  ledger — corresponding  to  a  customers' 
ledger  in  a  trading  concern. 

Classified  time  book — ^from  which  postings  are  made  to  the  debit  of 
clients'  accounts. 

A  time  book  need  not  form  the  basis  for  charging  the  fee,  since  the 
record  of  time  spent  is  usually  statistical  in  nature.  The  charge  to  the 
clients'  account  will  then  be  made  in  a  lump  sum  thru  the  journal. 

Classification  of  Accounts  Used  by  a  Firm  of  Lawyers.    You  can  get  a 

good  idea  of  what  accounts  are  used  in  a  professional  business  from  the 
following  list  of  accounts  now  used  by  a  leading  firm  of  lawyers.  It  must 
be  remembered,  however,  that  this  list  is  merely  typical,  and  that  the 
accounts  of  other  firms  would  probably  be  somewhat  different. 

Assignment  27,  Page  3 


Assets  : 
Cash 

Petty  Cash 
Accounts  Receivable 
Office  Furniture 
Library 
Leasehold 

LlABILITn:S  : 

Accounts  Payable 

Notes  Payable 

Reserve  for  Depreciation 

Proprietary  Accounts  : 

Capital  Account  for  each  partner 
Drawing  Account  for  each  partner 

Income  : 

Professional  Fees 

Commissions  on  Collections 
Expense  : 

Office  Salaries 

Office  Supplies 

Postage 

Telephone  and  Telegrams 

Periodicals 

Traveling  Expenses 

Rent 

Taxes 

Depreciation 

Loss  on  Bad  Debts 

Financial  Statements  of  a  Professional  Firm.  The  financial  statements 
of  a  professional  firm  are  prepared  in  accordance  with  the  same  principles 
as  for  trading  concerns.  There  are,  of  course,  no  inventories  of  merchan- 
dise to  consider,  but  there  are  often  accrued  or  deferred  items  that  require 
adjustment.  When  a  big  engagement  or  undertaking  is  only  partly  com- 
pleted at  the  time  of  preparing  the  annual  statements,  the  question  some- 
times arises  as  to  how  much  of  the  income  and  expense  connected  with  such 
service  shall  be  shown  in  the  accounts  of  the  current  year. 

This  may  be  settled  for  each  individual  case,  depending  on  the  nature  of 
the  work  and  the  terms  of  the  contract.  In  general,  the  conservative  policy 
should  be  followed  of  setting  up,  as  an  income  of  the  period,  only  so  much  as 
fairly  represents  the  proportion  of  the  whole  engagement  completed  at  the 
date  of  the  balance  sheet.  Usually,  the  completed  work  should  also  be 
approved  as  satisfactory.  This  implies  that  the  accounts  of  the  profes- 
sional firm  should  be  kept  on  the  accrual  basis,  rather  than  on  the  cash 
basis,  as  is  done  in  many  cases. 

In  most  nontrading  concerns  conducted  for  profit,  it  is  necessary  to  pre- 
pare only  the  balance  sheet  and  the  profit  and  loss  statement,  as  is  required 
in  a  trading  business.  In  some  of  the  larger  offices,  it  may  be  necesary  also 
to  furnish  certain  detailed  schedules  of  items  shown  on  the  main  state- 
ments. 

Assignment  27,  Page  4 


A  Typical  Case.    As  a  means  of  illustrating  the  preparation  of  state- 
ments for  a  professional  firm,  the  following  problem  is  presented  and  solved. 

The  trial  balance  of  Jones  &  Williams,  attorneys  at  law,  on  December  31, 
1921,  after  closing,  was  as  follows : 


Jones  &  Williams 
TRIAL  BALANCE,  DECEMBER  31,  1921 

DEBITS     CREDITS 

Cash $  6,950.00 

Accounts  Receivable 16,350.00 

Accounts  Payable  $  8,550.00 

Furniture  and  Fixtures  1,090.00 

Accrued  Interest  on  Notes  Receivable  (at  6  Per  Gent)  ....     160.00 

Notes  Receivable  8,000.00 

Notes  Payable 4,000.00 

Jones,  Capital  10,000.00 

Williams,  Capital 10,000.00 


$32,550.00  $32,550.00 


During  the  year  1922,  the  following  transactions  were  duly  recorded  on 
the  books : 

Charged  clients  with  fees  amounting  to  $50,000.00.  Incurred  expenses  thru  Accounts 
Payable,  as  follows:  Stationery,  $1,000.00;  rent,  $1,650.00;  miscellaneous, 
expense,  $4,000.00. 

Received  Cash:  From  clients  on  account,  $60,100.00;  on  account  of  notes  receivable, 
September  1,  $3,000.00;  on  account  of  interest  on  notes  receivable,  $480.00. 

Paid  Cash:  Office  Salaries,  $3,500.00;  creditors,  $12,000.00;  notes  payable,  $2,000.00; 
intere.st  on  notes  payable,  $300.00;  Jones,  Personal  Account,  $18,300.00; 
Williams-Personal  Account,  $19,200.00. 

Adjustments:  Six  per  cent  interest  on  notes  receivable  from  September 
1, 1922,  had  accrued  but  was  not  entered  on  December  31,  1922.  Six  per  cent 
interest  on  notes  payable  from  September  1,  1922,  had  accrued  but  was  not 
entered.  Furniture  was  depreciated  at  the  rate  of  6  per  cent  a  year,  and  a 
Reserve  for  Depreciation  was  set  up  on  December  31,  1922.  Reserve  for 
Doubtful  Accounts  of  $500.00  was  also  created  on  December  31,  1922. 

In  solving  this  problem  we  shall  prepare : 

1.  Working  sheet  for  determining  the  trial  balance  on  December  31, 
1922. 

2.  Adjusting  Entries  for  accruals  and  reserves. 

3.  Summary  of  cash  receipts  and  disbursements  of  the  year. 

4.  Statement  of  income  and  expenses. 

5.  Balance  sheet  as  of  December  31, 1922. 

Assignment  27,  Page  5 


1.  SOLUTION 

WORKING  SHEET  FOR  DETERMINING  TRIAL  BALANCE,  December  31,  1922 


Cash 

Accounts  Receivable  .  . 
Furniture  and  Fixtures. 
Notes  Receivable.  .  .  . 

Notes  Payable  

Accrued  Interest  Rec.  . 
Accounts  Payable.  .  .  . 

Jones,  Capital 

Williams,  Capital  .  .  . 

Fees 

Stationery 

Rent 

Interest  Expense.  .  .  . 
Miscellaneous  Expense  . 
Office  Salaries  .  .  .  . 
Interest  Earned  .... 

Jones,  Drawing 

Williams,  Drawing  .  .  . 


TRIAL  BALANCE 
Dec.  31,  1921 


DEBIT 


$  6,950 

16,350 

1,090 

8,000 

160 


$32,550 


00 


CREDIT 


$  4,000 

8,550 
10,000 
10,000 


$32,550 


00 


TRANSACTIONS 
For  Year  1922 


DEBIT 


$  63,580 
50,000 


2,000 
12,000 


1,000 
1,650 
300 
4,000 
3,500 

18,300 
19,200 


$175,530 


00 


CREDIT 


55,300 
60,100 

3,000 

160 
6,650 


50,000 


320 


$175,530 


00 


00 


00 


TRIAL  BALANCE 
Dec.  31,  1922 


DEBIT 


$15,230 
6,250 
1,090 
5,000 


1,000 
1,650 
300 
4,000 
3,500 

18,300 
19,200 


$75,520 


00 


CREDIT 


$  2,000 

3,200 
10,000 
10,000 
50,000 


320 


$75,520 


00 


GO 


Figure  1. — In  this  comparative  statement,  note  especially  how  the  amounts  in  the  Trial 
Balance,  December  31,  1922,  are  determined. 

2.  The  following  journal  entries  will  adjust  the  books  for  accrued 
interest,  depreciation,  and  loss  from  bad  debts : 

JOURNAL 


DATE       L.F. 


EXPLANATION 


DEBITS 


CREDITS 


1922 
Dec. 


31 


Accrued  Interest  Receivable. 
Interest  Earned  .  .  . 


To  Record  Accrued  Interest  on  $5,000.00  at  6  Per  Cent, 
September  1  to  December  31. 


Depreciation  of  Furniture.  .  .  . 
Reserve  for  Depreciation. 


To  Set  Up  Annual  Depreciation  of  Furniture  at  6  Per 
Cent. 


Loss  from  Bad  Debts 

Reserve  for  Bad  Debts 


To  Provide  for  Loss  from  Bad  Debts. 


Interest  Expense  

Accrued  Interest  Payable. 


100 


65 


500 


40 


To  Record  Accrued  Interest  on  $2,000.00,  Notes  Payable 
at  6  Per  Cent  September  1  to  December  31. 


00 


40 


00 


00 


100 


65 


500 


40 


00 


40 


00 


00 


Figure  2. — These  adjusting  entries  are  necessary  in  order  to  secure  accurate  and  com- 
plete information  in  the  statements. 

Assignment  27,  Page  6 


3. 


Jones  &  Williams 
SUMMARY  OF  CASH  RECEIPTS  AND  DISBURSEMENTS 
For  Year  Ended  December  31,  1922 


Cash  on  Hand  January  1,  1922 S  6,950.00 

Accounts  Receivable  $60,100.00 

Notes  Receivable 3,000.00 

Interest 480.00 

63,580.00 

Total  Receipts $70,530.00 

Disbursements: 

Jones,  Drawing $18,300.00 

Williams,  Drawing  19,200.00 

Accounts  Payable 12,000.00 

Office  Salaries  3,500.00 

Notes  Payable  2,000.00 

Interest  Expense 300.00 

55,300.00 

Balance,  December  31,  1922 $15,230.00 


4. 


Jones  &  Williams 
STATEMENT  OF  INCOME  AND  EXPENSE 
For  Year  Ended  December  31,  1922 


Income: 

Professional  Fees  $50,000.00 

Less  Operating  Expenses: 

Office  Salaries  $  3,500.00 

Stationery 1,000.00 

Rent 1,650.00 

Miscellaneous  Expenses 4,000.00 

Depreciation  of  Furniture  65.40 

Loss  on  Bad  Debts 500.00 

10,715.40 


Net  Income  from  Practice  $39,284.60 

Other  Income: 

Interest  Earned  420.00 

$39,704.60 
Charges  to  Income: 

Interest  Expense 340.00 

Net  Income  for  the  Period $39,364.60 

Distribution: 

Mr.  Jones $19,682.30 

Mr.  Williams  19,682.30 

39,364.60 


Figure  3. — Both  of  these  statements  are  set  up  from  the  Trial  Balance  in  the  working 
sheet  of  Figure  1,  and  the  adjustments  in  Figure  2. 

Assignment  27,  Page  7 


5. 


Jones  &  Williams 
BALANCE  SHEET,  December  31,  1922 


ASSETS 

Cash $15,230.00 

Accounts  Receivable  $6,250.00 
Less  Reserve  for  Bad 

Debts 500.00 

5,750.00 


Furniture  and 

Fixtures  $1,090.00 

Less  Reserve  for 
Depreciation.  .  .  .     65.40 

•    1,024.60 

Notes  Receivable  5,000.00 

Accrued  Interest 
Receivable 100.00 


$27,104.60 


LIABILITIES  AND  CAPITAL 

Notes  Payable $  2,000.00 

Accounts  Payable 3,200.00 

Accrued  Interest 

Payable 40.00 

Capital  Accounts: 
Jones  Investment  .  $10,000.00 
Add  Profits.  .  .  .  19,682.30 


Less  Drawings.  . 


$29,682.30 
18,300.00 


Williams  Investment  10,000.00 
Add  Profits.  .  .  .  19,682.30 


Less  Drav/inp 


$29,682.30 
19,200.00 


11,382.30 


10,482.30 
$27,104.60 


Figure  4. — This  balance  sheet  is  set  up  from  the  last  two  columns  of  the  working  sheet 

and  the  adjusting  entries. 

Details  of  the  Solution.  The  working  sheet  of  Figure  1  shows  the  trial 
balance  at  the  beginning  of  December  31,  1921,  and  the  transactions  for  the 
current  year,  from  which  are  derived  the  trial  balance  on  December  31, 
1922. 

The  expression  "incurred  expenses  thru  accounts  payable"  used  in  the 
problem  simply  means  that  expense  accounts  have  been  charged  and 
Accounts  Payable  credited  instead  of  Cash.  Accounts  Payable  is,  of  course, 
debited  when  Cash  is  disbursed,  or  when  cash  is  paid  to  creditors,  as  stated 
in  the  problem. 

The  accrued  interest  receivable,  $100.00,  from  September  1  to  December 
31,  is  calculated  for  four  months  on  $5,000.00  at  6  per  cent. 

Of  the  $480.00  received  for  interest  during  the  year,  $160.00  canceled 
the  accrued  interest  at  the  beginning  of  the  year  and  left  $320.00  as  income. 
To  this  is  added  the  $100.00  accrued  from  September  1  to  December  31, 
1922,  which  makes  a  total  of  $420.00  as  the  income  from  interest  for  the 
year. 

The  accrued  interest  payable  from  September  1  to  December  31  is 
calculated  for  four  months  on  $2,000.00  at  6  per  cent.  This  $40.00  accrual 
plus  the  interest  paid,  $300.00,  equals  $340.00,  the  total  interest  expense. 

Fees  earned  cause  a  credit  to  the  Fees  Account,  which  corresponds  to  a 
Sales  Account,  and  a  debit  to  Accounts  Receivable  or  clients'  accounts. 


Assignment  27,  Page  8 


ACCOUNTING  PROCEDURE  FOR  NONTRADING  CONCERNS 
NOT  OPERATING  FOR  PROFIT 

Books  and  Accounts.  The  books  of  clubs,  societies,  associations,  and 
various  kinds  of  institutions  generally  consist  of  a  general  ledger,  a  cash 
book,  and  a  journal;  and  usually  there  is  also  a  voucher  register  or  invoice 
register  of  some  sort.  In  addition  to  these,  various  subsidiary  records  are 
kept  as  the  nature  of  the  organization  demands. 

For  example,  in  a  charitable  institution  receiving  many  donations,  some 
of  which  are  annual  subscriptions  pledged  in  advance,  quite  an  elaborate 
card  system  of  subscribers'  or  donors'  accounts  may  be  found.  These  cor- 
respond to  a  customers'  ledger,  and  should  represent  at  any  time  the  balance 
of  the  unpaid  pledges.  They  may  be  controlled  by  a  Pledges  Receivable 
Account  on  the  general  ledger,  but  are  very  often  found  merely  as  a 
memorandum  record.  The  former  method  is,  of  course,  the  better  from 
the  accounting  standpoint,  but  it  is  not  generally  used  in  practice 
since  it  involves  the  procedure  of  debiting  Pledges  Receivable  and  crediting 
an  account  called  "Reserve  for  Subscriptions"  at  the  time  the  pledges  are 
signed. 

Pledges  which  are  uncollectible  will  be  reversed  by  a  charge  against 
Reserve  for  Subscriptions,  and  the  Pledges  Receivable  Account  closed.  As 
pledges  are  collected,  Cash  is  debited  and  Pledges  Receivable  credited.  A1 
the  end  of  the  year  an  adjusting  entry  is  required  for  the  total  amouni 
received  from  pledges,  as  follows : 

Reserve  for  Subscriptions „ $ 

Contributions  from  Pledges $ 

The  latter  is  a  Revenue  Account,  going  either  into  current  income  foi 
the  period,  or  into  a  Capital  Increase  Account.  The  cash-payments  book  oi 
a  charitable  institution  provides  columns  to  classify  expenditures  as  be- 
tween administration  and  relief,  and  to  show  further  the  nature  of  the  relief 
work. 


ACCOUNTS  USED  BY  THE  MIDWEST  GOLF  CLUB 

The  following  accounts,  used  by  a  prominent  golf  club,  are  typical  of 
what  can  be  expected  in  a  club  of  ordinary  size.  The  following  list  is  merely 
suggestive : 

ASSETS 
Fixed  : 

Land  and  Buildings 

Furniture  and  Fixtures 

Equipment  (such  as  lawn  mowers,  sprinkling  devices,  etc.) 

Endowments 

Assigniment  27,  Page  9 


Current  : 

Cash  (bank  account) 
Petty  Cash 
Dues  Receivable 
Notes  Receivable 

Deferred  Charges: 
Supplies  (inventory) 
Prepaid  Insurance 
Prepaid  Interest 


LIABILITIES 


Fixed  : 
Mortgage  Payable 


Current  : 

Accounts  Payable 
Accrued  Interest  Payable 
Accrued  Taxes 

Proprietorship  : 
Capital  Surplus 
Reserves 

PROFIT  AND  LOSS  ACCOUNTS 

Income  : 
Membership  Dues 
Initiation  Fees 
Revenue  from  Restaurant 
Revenue  from  Bowling 

EXI'ENSE  : 

Supplies  for  Restaurant 

S^ipplies  for  Bowling 

Office  Salaries 

Caretaker's  Salary 

Heat  and  Light 

Depreciation 

Telephone  and  Telegrams 

Advertising 

Entertainment 

Repairs 

Incidental  Expense 

Special  Records  for  Clubs.  Clubs  and  societies  should  have  a  member- 
ship-dues register  as  well  as  an  accounts  receivable  ledger  if  charges  other 
than  dues  are  made  to  members.  Sundry  accounts  receivable  are  best  car- 
ried in  the   general  ledger.    Social  clubs  often  have  billiard  room,  bowling 

Assignment  27,  Page  10 


alley,  cafe,  cigar  stand,  etc.,  as  operating  units.  These  activities  require 
that  records  be  kept  on  an  accrual  basis  and  be  distributed  according  to 
departments,  in  exactly  the  same  manner  as  a  trading  concern.  For 
example,  the  Cafe  Operating  Account  should  be  debited  with  all  supplies 
and  expenses  chargeable  against  the  cafe.  It  will  be  credited  with  the  cafe 
revenue  and  at  the  close  of  the  month  or  year  with  the  inventory  of  supplies 
and  provisions. 

Here  is  a  Cafe  Revenue  Account  as  it  would  appear  after  the  entries 
during  the  year  are  made.  Usually  such  an  account  would  contain  many 
detail  entries.  Only  enough  are  shown  here  to  illustrate  the  purpose  of  the 
Revenue  Account. 

CAFE  REVENUE 


1922 


Jan. 
July 
Dec. 


Supplies  

Expenses  

Expenses  

Balance,  Net  Profit. 


1,200 
920 
400 

1,956 


4,476 


00 


1922 


Dec. 


31 


Revenue  for  Year  . 
Inventory  Supplies 


4,276 
200 


4,476 


00 


The  balance  shows  the  net  profit  or  loss  for  the  year  and  is  carried  to 
the  annual  report  as  Net  Revenue  from  Cafe.  Similarly,  the  cigar  stand, 
billiard  room,  bowling  alley,  bar,  dormitory,  or  other  operating  accounts  are 
kept,  and  the  net  result  closed  monthly  or  annually  into  the  corresponding 
Net  Revenue  Account.  This  enables  one  to  see  from  a  glance  at  the  proper 
Net  Revenue  Account  the  relative  profitableness  of  the  department  under 
consideration. 

How  Clubs  Handle  Depreciation  and  Replacements.  Depreciation 
charged  as  an  expense  of  maintenance  in  institutions  or  clubs  not  conducted 
for  profit  does  not  mean  very  much.  In  the  case  of  a  club,  if  depreciation 
is  charged  on  the  building  and  furniture,  and  in  addition  repairs  are  made 
as  needed,  the  members  presumably  are  paying  part  of  their  dues  each  year 
for  the  purpose  of  replacing  the  fixed  property,  when  it  becomes  necessary. 
In  most  clubs,  however,  the  building  and  furniture  will  be  replaced  by 
special  contributions  or  by  a  bond  issue,  even  after  the  charge  for  deprecia- 
tion has  been  made  regularly.  The  reason  for  this  is  that  the  money  sup- 
posedly paid  in  each  year  as  a  replacement  fund  was  used  for  something 
else,  thru  ignorance  on  the  part  of  the  club  officials  as  to  what  a  reserve  is 
really  for.  The  only  means  of  avoiding  such  a  situation  is  to  actually  fund 
the  depreciation  charges  and  invest  the  fund  in  liquid  securities,  such  as 
stocks,  bonds,  etc. 

A  Y.M.C.A.  receiving  donations  as  its  principal  means  of  support,  needs 
to  charge  depreciation  on  its  building  and  furniture  as  an  operating  expense. 
At  the  close  of  the  year,  its  operating  statement  should  show  the  actual  cost 
of  operation.  Donors  are  asked  to  contribute  the  amount  of  the  expenses 
as  shown  for  the  last  year  on  the  theory  that  they  will  be  practically  the 


Assignment  27,  Page  11 


same  for  the  coming  year.  The  full  amount  is  raised.  The  process  is 
repeated  for  several  years.  When  the  building  needs  replacing,  one  of  two 
conditions  is  met. 

1.  The  trustees  have  a  fund  on  hand  sufficient  to  build  a  new  building, 
as  a  result  of  having  the  annual  contributions  representing  the 
amount  of  depreciation  set  aside. 

2.  The  trustees  must  call  upon  some  wealthy  person  or  persons  to  donate 
a  large  sum  for  the  erection  of  a  building.  If  the  latter  is  the  case, 
as  it  more  likely  would  be,  it  means  that  the  donors,  from  year  to 
year,  have  been  contributing  for  replacement  purposes,  but  that  the 
money  has  been  used  in  some  other  way. 

How  to  Prepare  Statements  for  a  Country  Club.  The  following  problem 
illustrates  some  of  the  transactions  of  a  club  and  shows  how  the  necessary 
statements  are  prepared. 

The  West  Shore  Country  Club  on  January  1,  1922,  had  a  balance  of 
$4,000.00  cash.  The  transactions  during  the  year  are  represented  in  the 
following  accounts : 


Cash $  7,218.00  $  2,515.00 

Dues  Receivable 6,200.00    7,100.00 

Income  from  Dues 6,200.00 

Library  Equipment 500.00 

Billiard  Equipment  1,700.00 

Billiard  Expenses 200.00 

Office  Expenses 150.00 

Telephone 150.00      10.00 

Interest  15.00     108.00 

Accounts  Payable  1,500.00    1,900.00 

Notes  Payable 200.00 

$17,833.00  $17,833.00 


Assuming  that  the  billiard  equipment  and  billiard  expense  charges  were 
made  thru  Accounts  Payable,  prepare  a  summary  of  cash  receipts  and  dis- 
bursements. Also  prepare  a  statement  of  income  and  expenses  for  the  year. 

Advantage  of  Using  a  Working  Sheet.  Before  we  can  prepare  the  two 
statements  called  for,  we  must  analyze  the  transactions.  That  is,  we  must 
account  for  all  the  cash  received  and  all  the  cash  disbursed.  To  accomplish 
this,  we  use  a  simple  working  sheet,  in  which  we  break  up  the  transactions 
into  their  elements. 

In  other  words,  we  list  all  amounts  actually  received  and  disbursed,  as 
opposed  to  the  items  that  represent  income  and  expense.  Cash  disburse- 
ments are  not  all  expenses,  neither  are  all  cash  receipts  income.  Study  the 
following  working  sheet  to  see  how  the  analysis  is  made. 

Assignment  27,  Page  12 


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Assignment  27,  Page  13 


Analysis  of  Cash  Receipts  as  Distinguished  from  Income.  In  solving 
this  problem,  we  start  with  the  cash  items  as  shown  in  the  working  sheet. 
Since  $7,218.00  represents  the  amount  received,  it  is  necessary  to  select 
those  credit  items  which  show  the  source  of  the  cash  so  received.  In  look- 
ing down  the  credit  transactions  column  it  is  obvious  that  the  $2,515.00 
credit  to  Cash  has  nothing  to  do  with  the  debit  to  Cash.  The  $7,100.00 
credited  in  the  Dues  Receivable  Account  is  presumed  to  be  made  up  largely, 
if  not  entirely,  of  cash,  because  it  is  known  that  the  Dues  Receivable 
Account  is  debited  as  dues  are  levied  during  the  year  and  credited  as  the 
amount  receivable  is  reduced  for  any  reason  whatever.  Dues  Receivable 
might  be  reduced  by  cancellation  thru  action  of  proper  officials,  executives, 
committees,  or  boards,  of  governors.  Accordingly,  in  placing  this  $7,100.00 
as  a  cash  receipt  item,  we  do  so  only  for  the  time  being,  until  it  is  possible  to 
determine  whether  any  other  items  seem  to  indicate  the  Dues  Receivable 
were  reduced  otherwise  than  upon  receipt  of  cash  from  the  members.  The 
fact  that  tiie  credit  to  Dues  Receivable  is  greater  in  amount  than  the  debit 
means  that  some  of  last  year's  dues  were  collected  or  that  some  have  been 
collected  in  advance  to  apply  on  the  approaching  year. 

Take  the  next  credit  item,  $6,200.00  Dues,  which  is  like  a  Sales  Account 
in  a  trading  concern.  Since  it  is  the  same  in  amount  as  the  debit  to  Dues 
Receivable,  it  is  apparent  that  it  is  the  result  of  an  entry  charging  members 
with  dues  for  the  year.  Accordingly,  it  forms  no  part  of  the  cash  received 
as  a  part  of  the  statement,  but  Cash  was  debited  and  Dues  Receivable  was 
credited  when  the  cash  was  received.  The  $6,200.00  is  evidently  included 
already  in  the  cash  receipts,  $7,218.00. 

The  $10.00  credit  to  Telephone  is  undoubtedly  caused  by  the  receipt  of 
cash.  In  a  club,  it  is  quite  common  for  members  to  use  the  telephone  for 
long  distance  calls  and  pay  for  them  later.  The  club,  in  this  case,  undoubt- 
edly paid  the  full  telephone  bill  for  the  year,  amounting  to  $150.00,  but 
received  $10.00  back  from  members.  Usually,  such  charges  are  made  thru 
an  Accounts  Receivable  Account,  which  is  ultimately  converted  into  cash. 
Since  no  Accounts  Receivable  Account  seems  to  be  debited  in  this  case,  and 
since  the  charge  to  Dues  Receivable  exactly  corresponds  with  the  credit  to 
Dues,  it  is  only  natural  to  assume  that  the  $10.00  credit  to  Telephone  came 
as  a  result  of  a  debit  to  Cash. 

In  a  similar  manner,  the  $108.00  Interest  credit  represents  a  cash 
receipt  item.  One  does  not  find  any  Accrued  Interest  Receivable,  or  similar 
account,  to  indicate  that  any  portion  of  the  $108.00  might  be  the  result  of 
an  adjusting  entry.    All  the  $108.00  was  actually  received. 

Since  it  is  known  that  a  credit  to  Accounts  Payable  is  usually  accom- 
panied by  a  debit  to  some  expense  or  property  account  other  than  Cash,  it 
is  hardly  necessary  to  try  to  connect  the  $1,900.00  item  with  cash  received. 
This  is  especially  true  since  the  problem  states  that  "billiard  equipment  and 
billiard  expense  were  made  thru  Accounts  Payable."  It  is  seen  that  the 
sum  of  the  two  charges  mentioned  equals  in  amount  the  $1,900.00  credit  to 
Accounts  Payable. 

As  a  result  of  this  scrutiny  of  the  credit  items,  it  seems  that  the 
$7,100.00,  $10.00  and  $108.00  are  the  only  ones  credited  at  the  same  time 
Cash  was  debited.  Accordingly,  the  total  cash  receipts  should  be  the  sum 
of  the  three  items  mentioned.    By  referring  to  the  solution,  it  is  seen  that 

Assignment  27,  Page  14 


these  do  correspond  with  the  total  Cash  Received  as  given  in  the  trans- 
actions for  the  year. 

Analysis  of  Cash  Disbursements  as  Distinguished  from  Expenses.  After 
completing  the  analysis  of  the  cash  received,  the  next  step  is  to  analyze  the 
cash  disbursements.  Enough  charges  are  to  be  selected  to  make  up  a  total 
of  $2,515.00,  representing  cash  paid.  This  selection  is  made  in  compliance 
with  one's  knowledge  of  accounts  as  to  when  they  are  ordinarily  debited 
and  credited.  The  first  two  debit  items  have  been  taken  care  of  already  as 
having  no  direct  effect  on  cash  disbursements.    The  third  item,  $500.00,  for 

1 

West  Shore  Country  Club  I 

STATEMENT  OF  CASH  RECEIPTS  AND  DISBURSEMENTS  | 

For  the  Year  1922 


Balance,  January  1,  1922  S  4,000.00 

Receipts: 

Dues  Received  $  7,100.00 

Telephone 10.00 

Interest 108.00 

7,218.00 


$11,218.00 
Disbursements: 

Library  Equipment  $   500.00 

Office  Expense 150.00 

Telephone  150.00 

Interest 15.00 

Accounts  Payable 1,500.00 

Notes  Payable  200.00 

■ — 2,515.00 


Balance  December  31,   1922 $  8,703.00 


West 
STATEMENT 
Fo 

Shore  Coun 

OF  INCOME 

r  the  Year 

try  Club 
AND  EXPENSES 
1922 

Income: 

Membership  Dues  .  .  . 

S 

6 

200.00 

108.00 

10.00 

Interest  Earned  .  .  . 

Telephone  Commission. 

Expenses: 

Interest 

.  $ 

15.00 
200.00 
150.00 
150.00 

$ 

6 

318.00 
515.00 

Billiard  Expense.  .  . 

Office  Expense.  .  .  . 

Telephone  

Excess  of  Income  Over  Exp 

enses  .  . 

$ 

5 

803.00 

Figure  6. — In  the  cash  statement,  you  will  note  the  balance  of  $4,000.00  on  January  1, 

1922.    To  this  is  added  the  cash  received  during  the  year.    From  this  amount  is  deducted 

the  cash  paid  out.    The  income  and  expense  statement  contains  the  same  items  as  those 

in  the  income  and  expense  columns  of  the  working  sheet. 

Assignment  27,  Page  15 


library  equipment,  was  probably  created  as  a  result  of  buying  on  account  or 
for  cash.  Since  it  has  been  established  in  this  instance  that  the  only  pur- 
chases on  account  were  those  for  billiard  equipment  and  billiard  expense, 
this  $500.00  purchase  must  be  included  as  an  item  among  the  cash  pay- 
ments. By  similar  reasoning,  the  Office  Expense,  Telephone,  Interest,  Ac- 
counts Payable,  and  Notes  Payable  debits  must  be  considered  as  items  to 
place  in  the  statement  of  receipts  and  payments  as  affecting  the  disburse- 
ment. Placing  the  balance  of  $4,000.00,  on  hand  at  the  beginning  of  the 
year,  in  its  proper  place,  one  finds  that  the  balance  at  the  close  of  the  year 
is  $8,703.00. 

Net  Income  Not  the  Same  as  the  Cash  Balance.  It  should  be  noted  that 
while  the  net  income  for  the  year  was  $5,803.00,  there  was  only  $4,703.00 
more  cash  at  the  close  than  at  the  beginning  of  the  year.  Thus,  it  is  seen 
that  cash  increase  is  not  synonymous  with  profits ;  neither  is  cash  decrease 
the  same  as  losses. 

From  the  working  sheet  and  its  explanation,  it  is  now  a  comparatively 
easy  matter  to  prepare  the  two  statements  called  for.  The  cash  statement 
is  set  up  from  the  cash  columns  of  the  working  sheet  and  the  income  and 
expense  statement  is  set  up  from  the  expense  and  income  columns.  If  a 
columnar  cash  book  is  used,  the  cash  statement  can  be  prepared  from  the 
cash  book  without  a  working  sheet.     (See  Figure  6.) 

Comments  on  the  Solution.  This  problem,  besides  illustrating  some  of 
the  distinguishing  characteristics  of  club  accounts,  shows  clearly  the  dif- 
ferences between  cash  receipts  and  income,  and  cash  disbursements  and 
expenses. 

The  income  of  the  West  Shore  Country  Club  is  $6,318.00,  while  the  cash 
received  amounts  to  $7,218.00.  Evidently,  the  excess  $900.00  in  the  cash 
received  is  not  income  for  the  period.  TTiis  $900.00  may  have  been  received 
either  for  back  dues  or  for  dues  paid  in  advance.  Income  represents  the 
earnings  of  the  period,  while  cash  receipts  include  all  actual  cash  received. 
The  income  should  also  include  all  accrued  earnings,  such  as  accrued 
interest,  uncollected  commission,  etc.,  as  in  the  profit  and  loss  statement  of 
a  trading  concern.  The  West  Shore  Country  Club  did  not  have  any  such 
items.  In  the  statement  of  income  and  expense  of  the  Jones  &  Williams 
firm,  shown  on  page  7  you  have  an  item  of  accrued  interest,  which  is  added 
to  the  interest  actually  received. 

A  difi"erence  is  also  seen  between  expenses  and  cash  disbursements. 
The  expenses  of  the  West  Shore  Country  Club,  as  shown  on  the  statement, 
are  $515.00,  while  the  cash  disbursements  amount  to  $2,515.00.  The  cash 
paid  out,  that  cannot  be  considered  as  expense,  is  composed  of  $500.00  for 
library  equipment,  and  $1,500.00  paid  to  creditors.  Both  payments  reduce 
the  Accounts  Payable.  The  first  item  is  for  the  purchase  of  a  new  asset, 
while  the  second  reduces  a  liability.  Neither  of  these  transactions  gives 
rise  to  any  expense,  but  they  do  affect  the  Cash  Account. 

Expenses  must  also  include  items  that  have  not  yet  been  paid,  such  as 
accrued  interest  payable,  accrued  wages,  etc.  The  West  Shore  Country 
Club,  however,  did  not  have  any  such  accruals. 

Assignment  27,  Page  16 


There  is  thus  a  great  difference  between  the  expenses  of  a  business  and 
the  cash  disbursements.  They  should  therefore  never  be  confused.  Such 
distinction  is  very  essential  in  trading  as  well  as  nontrading  concerns,  and 
in  profit  as  well  as  nonprofit  enterprises. 


MAIN  POINTS  IN  THIS  ASSIGNMENT 

In  this  assignment  you  have  not  learned  merely  a  set  of  rules  that  must 
be  followed  in  keeping  the  books  of  nontrading  concerns.  You  have  become 
familiar  with  certain  principles  that  are  applied  especially  to  nontrading 
concerns.  The  most  important  of  these  points  are  summarized  here  so  that 
you  will  be  able  to  fix  them  in  mind  and  apply  them  to  your  problem  work. 

First:  The  distinction  between  nontrading  concerns  and  other  busi- 
nesses : 

1.  Commercial  nontrading  concerns  sell  service. 

2.  Other  businesses  both  as  merchandising  and  manufacturing  buy 
and  sell  commodities. 

Second:    Classification  of  nontrading  concerns. 

1.  Those  that  are  conducted  for  profit. 

2.  Those  that  are  not  conducted  for  profit. 

Third :  Essential  Accounting  Features  of  nontrading  concerns  for  profit. 

1.  Other  accounts  used  in  place  of  Sales  Account. 

2.  Special  accounting  records  used  by  professional  firms. 

3.  Classification  of  accounts  used  by  professional  firms. 
Fourth :  Accounting  for  nontrading  concerns  not  operating  for  profit. 

1.  Special  registers  for  members  in  club. 

2.  Special  revenue  accounts  for  cafe,  restaurant,  billiard  room,  etc. 

3.  Classification  of  accounts  for  a  club. 
Fifth:   Preparation  of  statements. 

1.  Cash  receipts  distinguished  from  income. 

2.  Cash  disbursements  distinguished  from  expense. 

3.  Cash  balance  distinguished  from  net  income. 

Thruout  the  assignment  you  have  also  seen  how  the  trial  balance  can  be 
developed  by  taking  the  trial  balance  of  a  previous  date  and  giving  effect  to 
all  the  transactions  during  the  period.  This  is  a  method  often  used  by  an 
accountant  under  certain  conditions,  especially  when  the  records  are  incom- 
plete in  some  particular. 

Assignment  27,  Page  17 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  27 
Prepare  and  send  in  solutions  for  all  of  the  following  problems : 

1.  Give  the  name  of  the  account  or  accounts  in  each  of  the  following 
enterprises  that  correspond  to  the  Sales  Account  of  a  trading  concern: 
hotel  (rooms  only),  architect,  real  estate,  physician,  Salvation  Army,  gas 
company,  railroad  company,  theater. 

2.  Show  in  journal  form  the  entries  necessary  to  record  the  following 
transactions  of  a  club: 

(a)  Annual  dues  levied. 

(b)  1.  Light  bill  handled  thru  accounts  payable. 
2.  Payment  of  light  bill  later. 

(c)  Additional  bookcase  purchased  for  cash. 

(d)  Collections  made  from  members  on  account  of  dues. 

(e)  Cancellation  of  last  year's  dues  as  uncollectible. 

(f)  Adjustment  for  depreciation  of  furniture  at  end  of  period. 

3.  From  the  data  appearing  on  the  books  of  the  Roosevelt  Club  on 
December  31,  1922,  prepare  the  following: 

(a)  A  trial  balance  as  of  December  31,  1922. 

(b)  A  summary  of  receipts  and  disbursements  for  the  year  ended  December  31, 
1922.  Distinguish  carefully  between  cash  disbursements  and  expenses  handled 
thru  Accounts  Payable.  Expenditures  amounting  to  $7,240.00  were  credited  to 
the  Accounts  Payable  account,  as  follows:  entertainment,  $1,360.00;  general 
expense,  $925.00;  taxes,  $75.00;  books  for  the  library,  $500.00;  new  furniture, 
$3,600.00;  postage  and  stationerj^,  $280.00;  periodicals,  $400.00;  telephone, 
$100.00. 

(c)  A  statement  of  income  and  expenses  for  the  year  ended  December  31,  1922. 

(d)  A  balance  sheet  as  of  December  31,  1922. 


WORKING  TRIAL  BALANCE  OF  THE  ROOSEVELT  CLUB 


Post-Closing  Trial  Bal- 
ance, December  31,   1921 


DEBIT 

Cash $13,400.00 

Dues  Receivable 1,000.00 

Dues 

Library 1,400.00 

Entertainment 

General  Expenses  

Taxes 

Postage  and  Stationery  

Clubhouse 5,000.00 

Investment  in  Bonds 

Periodicals 

Furniture 4,500.00 

Telephone 

Interest  Earned 

Advertising 

Accounts  Payable  

Capital 


CREDIT 


$  2,200.00 
23,100.00 


$25,300.00  $25,300.00 


Transactions  during 
1922 


DEBIT 
$10,850.00 
10,000.00 

500.00 

1,360.00 

925.00 

75.00 

280.00 

6,000.00 
400.00 

3,600.00 
100.00 

20.00 
8,600.00 


CREDIT 
$14,620.00 
10,500.00 
10.000.00 


20.00 


10.00 
320.00 

7,240.00 


$42,710.00  $42,710.00 


iJ 


Assignment  27,  Page  18 


4.  A  lodge  had  a  membership  of  500  beneficial  and  120  social  members 
at  the  beginning  of  the  year  1922.  Its  records  showed  that  75  beneficial 
and  15  social  members  were  taken  in  during  the  year  as  follows: 

25  beneficial  and  10  social,  April  1. 
20  beneficial  and  5  social,  July  1. 
30  beneficial,  October  1. 

The  annual  dues  are  payable  quarterly,  in  advance,  at  the  following 
rates:  Beneficial,  $9.00  per  year;  Social,  $5.00  per  year. 

Three  of  the  beneficial  members  died  during  the  year,  one  on  June  10, 
one  on  November  10  and  one  on  November  18.  The  lodge  contributed  $150 
burial  expense  and  a  floral  wreath  at  a  cost  of  $10  in  each  case. 

The  general  report  for  1922  showed  that  5  beneficial  and  3  social  mem- 
bers were  dropped  at  the  close  of  the  year  for  failure  to  pay  dues.  The 
rules  provide  that  members  are  dropped  if  no  dues  have  been  paid  for  a 
year.  Dues  were  owing  at  the  beginning  of  1922  from  10  social  members 
since  October  1,  1922,  and  at  the  end  of  1922  there  were  29  beneficial  and  7 
social  members  who  had  not  paid  their  dues  for  the  last  quarter. 

During  the  year  two  entertainments  were  given,  the  first  was  for  the 
benefit  of  the  Old  Folks  Home  and  $382.00  was  received.  Expenses  were 
paid  amounting  to  $95.00  and  the  balance  was  sent  to  the  Home.  The  pro- 
ceeds from  the  second  entertainment  were  $514.40,  expenses  of  $117.60 
have  not  been  paid,  but  the  balance  was  given  to  the  Childrens  Home.  The 
lodge  also  donated  $50.00  to  the  Red  Cross  during  1922. 

A  per  capita  tax  of  $0.60  per  member  was  paid  to  the  Grand  Lodge  at 
the  end  of  1922,  based  on  the  revised  membership  at  that  date.  The  lodge 
owns  the  building  in  which  the  hall  is  located.  Part  of  this  building  was 
leased  in  1921  to  a  storekeeper  who  has  paid  a  rental  of  $150.00  per  month 
in  advance.  During  the  year  there  was  a  fire  in  the  store  which  necessi- 
tated the  expenditure  of  $250.00,  but  this  was  collected  from  the  insurance 
company. 

Cash  on  hand  at  the  beginning  of  the  year  was  $2,000.00  and  stationery 
bills  for  $36.70  from  1921  were  paid  in  January,  1922.  Lodge  expenses 
paid  during  the  year  amounted  to  $460.00. 

From  the  facts  given,  make  up  a  statement  of  receipts  and  disburse- 
ments, showing  cash  on  hand  at  December  31,  1922.  The  best  plan  of  solu- 
tion is  to  study  the  facts  separately  and  then  summarize  the  results  on  a 
cash  statement. 


Assi^ment  27,  Page  19 


k 


Higher  Accountancy 


DC 


PRINCIPLES 
PRACTICE  flw^ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  28 

AGENCY  ACCOUNTS 
BRANCHES— CONSIGNMENTS 


I 


THERE  exists  a  real  dearth  ol  properly  trained 
Public  Accountants.  For  men  who  are  fully 
equipped  and  who  have  vision  and  are  inspired  with 
a  real  appreciation  of  the  scope  of  the  Accounting 
profession,  the  opportunities  are  unlimited,  both  for 
service  and  for  receiving  equivalent  compensation. 

W.  D.  WHITCOMB 

Whitfield,  Whitcomb  G  Co.,  Portland,  Oregon 


LaSalle  Extension  University 

Chicago 


NHA-28 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 
.5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright,  1923 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 

Printed  in  the  U.  S.  A. 


AGENCIES 
BRANCHES  AND  CONSIGNMENTS 

Commercial  enterprises  may  be  local  or  nation  wide  in  scope.  Such 
organizations  vary  from  the  simple  form  of  the  local  retail  store  to  the 
complexity  of  the  modern  giant  corporation  which  buys,  produces,  and 
sells  in  every  part  of  the  country ;  indeed,  in  every  quarter  of  the  globe. 

These  complexities  of  organization  mean,  of  course,  elaborated  account- 
ing systems.  This  must  of  necessity  be  so  if  the  activities  of  distant 
agents,  branch  managers,  and  operating  centers  are  to  be  adequately  con- 
trolled and  their  operations  reflected  correctly  on  the  general  ledger  at  the 
home  office. 

To  a  surprising  extent  the  business  of  the  world  is  conducted  thru 
agencies  or  branch  houses.  As  proof  of  this  it  is  only  necessary  to  think 
of  the  large  insurance  companies  with  branches  in  every  important  city; 
the  extensive  chain-store  organizations  with  their  local  stores  in  every 
neighborhood  or  the  great  transcontinental  railroads  with  stations  from 
coast  to  coast. 

It  is  important  then  that  the  accountant  understand  the  methods  of 
accounting  for  branches  as  well  as  other  agencies,  such  as  commission 
merchants  and  merchandise  brokers. 

BRANCH  HOUSE  ACCOUNTING 

The  details  of  a  branch  accounting  system  are  of  course  dictated  by 
the  home  office.  It  may  consist  of  the  simplest  kind  of  a  daily  or  monthly 
report  of  operations,  or  it  may  be  as  independent  and  complete  a  set  of 
records  as  is  found  in  any  business  enterprise.  The  degree  to  which  the 
branch  system  is  independent  in  detaO  from  home  office  records  will 
depend  upon  the  nature  of  the  business,  the  distance  from  the  Home 
Office,  and  certain  special  features,  such  as  foreign  exchange  and  legal 
requirements  placed  on  the  enterprise. 

Accounting  Procedure  for  Branches.  Broadly  speaking,  one  of  two 
methods  is  usually  to  be  found  in  branch  liouse  accounting,  as  follows: 

1.  The  branch  will  keep  a  fairly  complete  set  of  books  which  will  be  duplicated 
at  the  home  office. 

2.  The  branch  will  report  its  operations  periodically  to  the  home  office  to  be 
incorporated  in  its  accounts,  keeping  only  such  accounts  as  are  necessary  to 
furnish  data  for  such  reports. 

The  first  method  is  not  very  extensively  used,  because  it  requires  an 
unnecessary  duplication  of  work.  Some  of  the  larger  concerns,  therefore, 
have  their  branches  keep  loose-leaf  records  and  send  them  to  the  head 
office  periodically  for  posting. 

Copyright,   1923 
La  Salle  Extension  University 
NHA-28  All  Rights  Reserved  in  All  Countries 

Printed  in  the  U.S.A. 


The  second  method  is  more  commonly  used,  because  the  accounting 
detail  is  less  burdensome.  The  control  obtained  thru  the  periodic  reports 
is  supplemented  by  traveling  auditors,  who  check  up  on  the  branch  inde- 
pendently. This,  together  with  the  custom  often  followed  of  permitting 
the  branch  manager  to  share  in  the  profits  of  his  branch,  usually  gives 
satisfactory  results  both  as  to  accounting  and  general  supervision. 

The  Tie-up  between  Branch  and  Head  Office  Books.  The  head  office, 
under  this  method,  will  usually  carry  a  Branch  Office  Account  and  the 
branch  office  a  Head  Office  Account.  These  accounts  are  the  counterparts 
of  each  other.  Cash  furnished  the  branch  is  charged  to  the  Branch  Office 
Account  on  the  books  of  the  head  office  and  is  credited  to  the  Head  Office 
Account  on  the  books  of  the  branch.  Similar  entries  are  made  for  mer- 
chandise sent  to  the  branch,  or  for  branch  expenditures  paid  by  the  head 
office. 

Remittances  made  by  the  branch  from  time  to  time  are  charged  to  the 
branch  Head  Office  Account  and  are  taken  up  as  a  credit  to  the  Branch 
Office  Account  on  the  ])ooks  of  the  head  office.  Like^^dse,  when  the 
branch  operations  are  reported  to  the  head  office,  the  Head  Office  Profits 
Account  will  be  credited  with  any  profit  or  charged  with  any  loss.  The 
head  office  on  the  other  hand  will  charge  the  branch  office  with  profits 
and  credit  it  with  losses. 

The  chief  problem  in  braneh  house  accounting,  therefore,  is  to  keep 
the  Branch  and  Head  Office  Accounts  periodically  reconciled.  TTiey  may 
disagree  at  times  because  of  items  recorded  in  one  set  of  accounts  but  not 
yet  taken  up  in  the  other.  For  instance,  merchandise  or  cash  may  be  in 
transit,  properly  charged  or  credited  in  one  account,  but  not  yet  received 
for  entry  in  the  other.  These  differences  must  always  be  taken  into  con- 
sideration in  bringing  about  a  complete  reconciliation. 

HOW  GOODS  ARE  CHARGED  TO  THE  BRANCH 

There  are  two  plans  in  common  use  by  which  the  head  office  charges 
the  branch  for  the  goods  shipped  to  it. 

1.  Goods  Charged  at  Cost  Price.  This  method  is  used  when  the  stock 
is  perishable,  when  prices  vary  according  to  quantities,  or  when  they 
fluctuate  rapidly  with  market  conditions.  It  is  also  most  desirable  when 
the  stock  is  of  such  a  nature  that  it  can  only  be  properly  checked  thru  a 
physical  inventory,  such  as  groceries,  drugs,  novelties,  etc. 

2.  Goods  Charged  at  Selling  Price.  It  frequently  happens  that  the 
proprietor  at  the  head  office  does  not  care  to  have  the  branch  manager 
know  how  much  profit  his  branch  is  earning.  Accordingly,  all  goods  that 
are  sent  to  the  branch  are  billed  at  the  selling  price  rather  than  at  cost. 

This  method  of  charging  the  branch  is  most  applicable  when  the  sell- 
ing price  remains  more  or  less  fixed.  It  makes  the  operation  of  a  per- 
petual inventory,  in  such  cases,  especially  valuable  as  a  check  on  merchan- 
dise. 


AssigTim«nt  28,  Pa^-e  2 


Under  either  method  the  main  accounting  problem  is  to  reconcile  the 
head  office  books  with  the  records  of  the  branch.  Both  methods  will 
now  be  illustrated  with  simple  problems. 

PROBLEM 

Accounting  Procedure  When  Goods  Are  Billed  at  Cost.  The  Smith  Mer- 
cantile Company,  of  New  York,  establishes  three  branches — in  Toledo,  Chi- 
cago, and  Denver.  Each  branch  is  required  to  keep  complete  records  and 
submit  monthly  reports.  The  transactions  of  the  Toledo  branch  are  as 
follows : 

Received  from  head  office  January  7,  1922: 

Cash $  6,000.00 

Merchandise  (at  cost  price) 35,000.00 

January  transactions: 

Sales  on  Account  25,000.00 

Sales  for  Cash 15,000.00 

Collections  from  Customers  17,000.00 

Freight  and  Expenses  Paid 6,200.00 

Monthly  Salary  of  Branch  Manager  Paid 300.00 

On  January  31,  the  branch  manager  makes  his  report  to  the  head 
office,  in  which  he  states  that  $9,000.00  worth  of  merchandise  is  still  on 
hand.    With  his  report  he  sends  a  check  for  $25,000.00. 

Using  this  data  we  set  up  the  solution  of  the  problem : 

I.  For  the  Branch  Books. 
II.  For  the  Head  Office  Books. 

I — Entries  on  the  Books  of  the  Branch.  In  presenting  the  books  of  the 
branch  we  show  the  following : 

(a)  Journal  entries  for  branch  transactions  during  January. 

(b)  Ledger  accounts  after  the  journal  entries  have  been  posted. 

(c)  Closing  entries. 

(d)  Head  Office  Account. 

In  recording  the  branch  transactions  we  have  entered  them  all  in  the 
journal.  Cash  transactions  would  of  course  be  entered  in  the  cash  book. 
Journal  entries  are  used  here  because  they  bring  out  clearly  the  debits  and 
credits. 

(a)    Journal  Entries  for  January  Transactions. 

1922 

Jan.   7     Cash S  6,000.00 

Head  Office $  6,000.00 

For  cash  received 
from  head  office 

Merchandise    $35,000.00 

Head  Office $35,000.00 

For  goods  received 
from  head  office 

Jan.   7-31     Customers $25,000.00 

Sales $25,000.00 

For  Sales  on  Account 

Assignment  28,  Page  3 


Cash $15,000.00 

Sales $15,000.00 

For  cash  sales 


Expenses $  6,200.00 

Cash $  6,200.00 

For  expenses  at  branch 


Cash $17,000.00 

Customers $17,000.00 

For  collections  from  customers 


1922 

Jan.  31  Expense $   300.00 

Cash $   300.00 

For  monthly  salary  of  branch 
manager 


Head  Office  $25,000.00 

Cash $25,000.00 

For  remittance  to  head  office 

(b)    Ledger  Accounts  of  the  Branch. 

After  the  journal  entries  have  been  posted,  the  ledger  accounts  on 
the  books  of  the  branch  will  appear  as  follows.  It  is  understood  of  course 
that  such  accounts  as  Customers',  Sales,  Expense,  and  Cash  would  con- 
tain detail  items.  Merely  balances  are  given  here  because  they  are  suffi- 
cient to  illustrate  the  purpose  of  the  accounts. 


CASH 


1922 

Jan.  7  From  head  office ''$'6,000.00 

7-31  Cash  sales 1^15,000.00 

7-31  Collections  from  customers:17,000.00 


1922 

Jan.  31  Expenses S  6,200.00 

Manager's  salary  ....  300.00 

Cash  sent  to  head  office  25,000.00 


HEAD  OFFICE 


1922 

Jan.  31  Cash  sent  to  head  office.  $25,000.00 


1922 
Jan.  7  Cash  received. 
Goods  received 


$  6,000.00 
35,000.00 


CUSTOMERS 


1922 

Jan.  31  Sales  on  account. 


11922 
Jan.  7-31  Collection  from 
customers.  .  .  . 


$17,000.00 


MERCHANDISE 


1922 

Jan.  7  From  head  office, 


$35,000.00  I 

EXPENSE 


1922 

Jan.  7-31  Expenses $  6,200.00 

Manager's  salary.  .  .  .    300.00 


SALES 


1922 
Jan.  7-31  On  account 
For  cash  . 


$25,000.00 
15,000.00 


Assignment  28,  Page  4 


(c)  Closing-  Entries  on  Books  of  Branch. 

On  January  31  the  branch  manager  will  make  the  following  closing 
entries : 

1922 

Jan.  31  Profit  and  Loss $35,000.00 

Merchandise 835,000.00 

To  adjust  the  previous 
inventory 


Inventory  $  9,000.00 

Profit  and  Loss $  9,000.00 

To  set  up  current  inventory 


Profit  and  Loss S  6,500.00 

Expense $  6,500.00 

To  close  the  Expense  Account 


Sales  . $40,000.00 

Profit  and  Loss $40,000.00 

To  close  the  Sales  Account 


Profit  and  Loss $  7,500.00 

Head  Office $  7,500.00 

To  close  Profit  and  Loss  into 
the  Head  Office  Account 


After  these  closing  entries  have  been  posted,  the  nominal  accounts 
will  appear  thus: 

EXPENSE 


1922 

Jan.  7-31  Expenses  

Manager's  salary 


$  6,200.00 
300.00 

$  6,500.00 


1922 
Jan.  31  Closed  to  Profit  and  Loss  $  6,500.00 


$  6,500.00 


SALES 


1922 
Jan.  31  Closed  to  Profit  and  Loss  .$40,000.00 


$40,000.00 


1922 
Jan.  7-31  On  account 
For  Cash  . 


$25,000.00 
15,000.00 

$40,000.00 


INVENTORY 


1922 
Jan.  7  Shipment  received $35,000.00 


1922 
Jan.  31  Closed  to  Profit 

and  Loss $35,000.00 


Feb.  7  Stock  on  hand 9,000.00 

PROFIT  AND  LOSS 


1922 

Jan.  31  Stock  received $35,000.00 

7-31  Expenses 6,500.00 

Balance  carried  to  Head 
Office  Account 7,500.00 


1922 

Jan.   31  Sales 

Stock  on  hand, 


$49,000.00 


$40,000.00 
9,000.00 


$49,000.00 


A.s.signment  28,  Page  5 


HEAD  OFFICE  ACCOUNT 


1922 
Jan.  31  Cash  sent  to  Head  Office.  $25,000.00 
Balance  carried  forward  .  23,500.00 


$48,500.00 


1922 

Jan.  7  Cash  received 

Shipment  received.  .  . 

7-31  Balance  of  Profit  and 

Loss  Account  


$  6,000.00 
35,000.00 

7,500.00 

$48,500.00 


Feb.  1  Balance  due  head  office.  $23,500.00 

(d)  Head  Office  Account  a  Liability  of  Branch.  Observe  the  debits 
and  credits  that  have  been  made  to  this  account.  It  has  been  credited  with 
the  cash  and  goods  received  from  the  head  office.  It  has  been  debited 
with  cash  sent  to  the  head  office. 

At  the  end  of  the  month  it  is  credited  with  the  net  profit  of  the  branch. 
That  is,  the  branch  Profit  and  Loss  Account  is  closed  into  the  Head  Office 
Account.  The  credit  balance  represents  the  amount  that  the  branch  owes 
the  head  office.    This  balance  is  an  actual  liability  of  the  Toledo  branch. 

The  account  also  shows  the  net  worth  of  the  branch,  which  in  this 
case  is  $23,500.00.  The  account  is  the  tie-up  between  the  branch  and  the 
head  office,  as  will  be  explained  later. 

II — Entries  on  the  Books  of  the  Head  Office.  Thus  far  we  have  con- 
sidered only  the  books  of  the  branch.  It  is  equally  important  that  you 
are  familiar  with  the  entries  on  the  books  of  the  head  office.  Separate 
accounts  will  be  kept  for  each  branch.  These  accounts  should  be  distinct 
from  the  accounts  in  whicli  the  other  ti-aiisactions  of  the  business  are 
recorded. 

The  head  office  entries  may  be  grouped  as  follows : 

(a)  Goods  shipped 

(b)  Cash  advanced 

(c)  Goods  purchased 

(d)  Expenses  paid 

The  entry  made  when  the  Smith  Mercantile  Company  sent  cash  and 
goods  to  the  Toledo  Branch  was  as  follows : 

1922 

Jan.  1  Toledo  Branch  $41,000.00 

Cash $  6,000.00 

Merchandise 35,000.00 

For  cash  advances  and  ship- 
ment to  Toledo  branch 

The  entries  on  January  31,  when  the  head  office  received  a  cash  remit- 
tance and  the  monthly  report  from  the  branch  manager,  were  as  follows: 

1922 

Jan.   31  Cash $25,000.00 

Toledo  branch $25,000.00 

For  cash  received  from 
Toledo  branch 


Toledo  branch   $  7,500.00 

Profit  and  Loss $  7,500.00 

To  record  profit  realized  on 
the  Toledo  branch 


Assignment  28,  Page  G 


After  these  entries  are  posted,  the  head  office  accounts,  affected  by 
the  entries,  will  appear  thus: 


TOLEDO  BRANCH 


1922 
Jan.  1  Shipments  to  branch  . 
Cash  advanced  .... 

.  .  $35,000.00 
.  .   6,000.00 
.  .   7,500.00 

1922 

Jan.  31  Cash  remitted.  .  . 
Balance 

.  .  .  $25,000.00 
.  .  .  23,500.00 

31  Profit  for  January.  . 

$48,500.00 

$48,500.00 

Feb.  1  Balance  

.  .  $23,500.00 

CASH 


1922  II  1922 

Jan.  31  Toledo  Remittance  ....  $25,000.00  |  Jan.  1  Toledo  Advances $  6,000.00 

MERCHANDISE 


1922 

Jan.  1  Toledo  Shipments  ....  $35,000.00 


PROFIT  AND  LOSS 


11922 
Jan.  31  Profit  Toledo  Branch  .  .  $  7,500.00 

The  last  three  accounts  would  also  contain  other  debit  and  credit  items, 
due  to  general  transactions  and  operations  in  the  other  branches.  They 
are  shown  here  for  the  purpose  of  illustrating  the  complete  record  of 
branch  entries. 

Purpose  of  the  Branch  Account.  You  will  observe  that  the  Branch 
Account  is  debited  with  goods  shipped  and  cash  advanced  to  the  branch. 
These  debits  represent  the  original  investment  of  the  head  office  in  the 
branch.  Other  shipments  and  advances  would  be  likewise  charged,  as  the 
investment  is  thereby  increased. 

Whenever  the  branch  makes  a  remittance  of  cash  to  the  head  office  the 
Branch  Account  is  credited,  as  shown  in  the  illustration.  At  the  end 
of  each  period  the  profit  realized  from  the  branch  operations  is  charged 
to  the  Branch  Account,  because  the  profit  increases  the  investment  made 
in  the  branch.  In  this  case  the  debit  balance  of  $23,500.00  represents  the 
net  investment  which  the  head  office  had  made,  plus  the  net  profit  as 
shown  by  the  following  analysis: 

ORIGINAL  AND  PRESENT  INVESTMENT  IN  BRANCH 

Cash  Advanced  $  6,000.00 

Stock  Shipped  35,000.00 


Total $41,000.00 

Less  Cash  returned 25,000.00 


Net  Investment $16,000.00 

Add  Profit  for  period  7,500.00 


Present  Investment  in  branch $23,500.00 


This  investment  appears  in  the  Branch  Account  as  a  debit  balance, 
representing  the  amount  for  which  the  branch  manager  must  account. 

Assignment  28,  Page  7 


On  the  books  of  the  branch  the  amount  consists  of  actual  assets,  which 
may  be  summarized  thus: 

ASSETS  OF  BRANCH: 

Cash $  6,500.00 

Stock 9,000.00 

Accounts  receivable    8,000.00 

$23,500.00 


TIE-UP  WITH  HEAD  OFFICE  BOOKS 

The  liabiUty,  or  accountability,  of  the  branch  to  the  head  office  for  these 
assets  is  shown  by  a  credit  balance  in  the  Head  Office  Account  on  the 
books  of  the  branch.  The  asset,  or  investment,  of  the  head  office  in  the 
branch  is  shown  by  a  debit  balance  in  the  Branch  Account  on  the  books  of 
the  head  office. 

You  can  see,  therefore,  that  the  accounts  of  the  branch  and  the  ac- 
counts of  the  head  office  are  completely  reconciled. 

This  reconciliation  feature  is  illustrated  by  the  chart  shown  in  Figure  1. 
Accounts  of  Toledo  Branch  Accounts  of  Head  Office 


Assets 
Cash 

Liabilities    and 
Capital 

:= 

Assets 

Liabilities  and 
Capital 

$6,500.00 
Accounts  Rec. 

Head  Office 

Toledo  Branch 

$23,500.00 

$23,500.00          1                iroprietorship 

$8,000.00 

Sto 

ck 

Investment     $16,000.00 
Profit                   7,500.00 

$23,500.00 

$9,000.00 

Reconciuation  of  Branch  Accounts  With  Books  ov  Head  Office 

Figure  1.  The  two  sets  of  books  are  reconciled  by  the  Branch  Account  of  the  head 
office  and  the  Head  Office  Account  of  the  branch.  The  accounts  given  here  contain 
merely  the  balances,  and  only  those  accounts  of  the  head  office  are  shown  that  relate  to 
the  Toledo  branch.  The  proprietorship  claim  of  the  head  office  would  of  course  be 
merely  a  part  of  the  Capital  and  Surplus  Accounts. 

Balance  Sheet  of  Head  Office.  When  the  balance  sheet  of  the  head 
office  is  prepared,  the  Toledo  Branch  Account  might  be  listed  on  the  asset 
side  along  with  the  Branch  Accounts  for  the  other  two  branches.  It  is 
much  better,  however,  to  distribute  the  branch  assets  among  the  various 
classes  of  assets  on  the  balance  sheet  in  order  that  the  group  totals  will 
be  correct. 

With  the  assets  properly  grouped  and  classified,  the  relation  between 
current  assets,  fixed  assets,  current  liabilities,  and  fixed  liabilities  will 
be  accurately   shown.     Anyone   using  the   statement   will  then  be   able 


Assignment  28,  Page  8 


to  pass  more  accurately  on  the  financial  and  credit  strength  of  a  concern. 
Unless  care  is  taken  in  this  particular,  false  conclusions  may  often  be 
deduced. 

PROBLEM 

Illustrating  the  Procedure  When  Goods  Are  Billed  at  Selling  Price.    A 

large  automobile  accessory  concern  has  headquarters  and  a  general  sales 
department  in  Chicago.  It  controls  ten  operating  branches  in  various 
parts  of  the  United  States.  All  purchases  for  the  branches  are  made  by 
the  head  office,  and  goods  are  billed  to  the  branches  at  50  per  cent  above 
cost  as  an  average  selling  price. 

On  May  1,  1922,  the  Detroit  branch  had  $3,900.00  worth  of  merchan- 
dise on  hand  at  the  billed  value.  It  also  had  cash  on  hand  of  $500.00,  and 
a  total  of  customers'  accounts  amounting  to  $4,800.00. 

On  May  9,  the  branch  received  additional  merchandise,  shipped  on  May 
2,  billed  at  $51,000.00.    During  the  month  the  following  sales  were  made: 
On  account— $45,300.00.     For  cash— $  3,000.00. 

It  collected  $30,000.00  from  customers  during  the  month  and  paid 
expenses  amounting  to  $2,800.00.  On  May  31  the  branch  manager  reported 
that  he  still  had  on  hand  $6,600.00  worth  of  goods.  He  also  sent  to  the 
head  oflice  a  check  for  $30,000.00. 

Using  this  data,  we  set  up  the  solution  of  the  problem: 
I — For  the  Branch  Books 
II— For  the  Head  Office  Books 

I — Book  of  the  Branch  Office.  The  following  accounts  will  be  used  by 
the  branch  to  record  the  May  transactions. 

Head  Office  Stock.     (Memorandum) 

Purchases  from  Head  Office.   (Memorandum)  ^ 

Head  Office  General 

Cash 

Customers 

Expenses 

Sales 

The  first  two  accounts  are  merely  memorandum  accounts,  and  have  no 
financial  significance.  When  goods  are  received,  the  Head  Office  Stock 
Account  is  debited  and  the  Purchases  from  Head  Office  Account  is  credited 
with  the  billed  value  of  the  goods.  The  debit  balance  of  the  first  is  always 
offset  by  the  credit  balance  of  the  second. 

All  the  other  accounts  on  the  books  of  the  branch  represent  actual 
values.  The  Head  Office  General  Account  is  a  liability  account  and  shows 
what  the  branch  owes  the  head  office.  Its  credit  balance  should  always 
agree  with  the  debit  balance  in  the  Branch  General  Account  on  the  books 
of  the  head  office. 

Assignment  28,  Page  9 


Ledger  Accounts  of  the  Branch  With  Transactions  Entered.    After  the 
May  transactions  have  been  entered,  the  branch  accounts  will  appear  thus : 


LEDGER  ACCOUNTS  FOR  DETROIT  BRANCH 

HEAD  OFFICE  STOCK 


1922 

May  1  Stock  on  hand $  3,900.00 

9  Shipments  fromhead  off ice  .  51,000.00 


11922 

May  31  Stock  on  hand  

Balance  (Goods  sold) 


$54,900.00 


$  6,600.00 
48,300.00 

$54,900.00 


June  1  Stock  on  hand $  6,600.00 

PURCHASES  FROM  HEAD  OFFICE 


1922 

May  31  Stock  on  Hand.  ■.  .  .  . 
Balance  (Goods  sold)  . 

.  .  $  6,600.00 
.  .  48,300.00 

1922 

May  1  Stock  on  hand  .  .  . 
9  Shipments  

June  1  Stock  on  hand  .  .  . 

.  .  .  $  3,900.00 
.  .  .  51,000.00 

$54,900.00 

$54,900.00 

...  $  6,600.00 

HEAD  OFFICE  GENERAL 


1922 

May  31  Cash  to  head  office 

Expenses  . 

Balance , 


$30,000.00 

2,800.00 

20,800.00 

$53,600.00 


1922 

May  1  Due  head  office 
31  Sales  


$  5,300.00 
48,300.00 


$53,600.00 


June  1  Balance  due  head  office  .  $20,800.00 


CASH 


1922 

May  1  Balance 

.  .  .  .  $   500.00 

1922 

May  31  Remittance .... 
Expenses 

.  ...  $30  000.00 

Cash  sales  .... 

.  .  .  .   3,000.00 
.  .  .  .  30,000.00 

.  .  .  .   2,800.00 

Collections.  .  .  . 

Balance  

.  .  .  .     700.00 

$33,500.00 

$33,500.00 

June  1  Balance 

.  .  .  .  $   700.00 

CUSTOMERS 


1922 

May  1  Due  from  customers  .  . 
Sales  on  Account  .  .  . 

.  .  $  4,800.00 
.  .  45,300.00 

1922 
May 

Collections  .  .  . 
Balance  

.  .  .  .  $30,000.00 
.  .  .  .  20,100.00 

$50,100.00 

$50,100.00 

June  1  Due  from  customers  .  . 

.  .  $20,100.00 

EXPENSE 


1922 

May  31  Expenses  paid. 


$  2,800.00 


1922 

May  31  To  Head  Office  General 
Account 


$  2,800.00 


SALES 

1922 

May  31  To  Head  Office  General 

Account  

.  $48,300.00 

1922 

May  31  Sales  on  Account.  .  . 
Cash  sales 

.  .  $45,300.00 
.  .   3,000.00 

$48,300.00 

Assignment  28,  Page  10 


Since  the  goods  are  billed  to  the  branch  at  an  average  sales  price,  no 
attempt  is  made  to  determine  the  profit  on  the  books  of  the  branch.  There 
is  no  Profit  and  Loss  Account  used,  therefore,  in  closing  the  branch 
accounts. 

The  amount  for  which  the  branch  must  finally  account  to  the  head 
office  is  found  in  the  two  accounts : 

Head  Office  General 
Head  Office  Stock 

How  To  Prepare  A  Branch  Report.  Business  houses  selling  thru 
branches  require  that  the  managers  of  the  branches  send  in  periodical 
reports.  In  most  cases  these  reports  are  required  monthly,  in  some  busi- 
nesses weekly  or  daily. 

When  a  business  has  rapid  turnover  and  requires  a  daily  checking  on 
financial  items,  daily  reports  are  submitted  by  the  branch.  When  details 
of  the  accounting  work  are  handled  by  the  head  office,  daily  or  weekly 
reports  are  made. 

If,  however,  the  central  ofl^ce  checks  its  branches  by  means  of  con- 
trolling accounts,  perhaps  monthly  reports  are  sufficient. 

In  general  it  may  be  said  that  the  frequency  of  the  branch  reports 
depends  largely  upon  the  nature  of  the  business,  the  form  of  the  organiza- 
tion, the  accounting  system  at  the  head  office  and  the  branch,  and  in  most 
cases  upon  the  personal  wishes  of  the  management  of  the  business. 

Most  business  concerns  now  furnish  their  branches  with  uniform  blank 
forms  to  be  filled  out  by  the  branch  manager.  The  report  generally  con- 
tains information  on  the  following  points: 

Stock 

Sales 

Customers'  Accounts 

Cash 

The  monthly  report  of  the  Detroit  manager  sent  on  May  31,  1922,  is 
illustrated  in  Figure  2. 

II — Books  of  the  Head  Office.  The  head  office  will  use  the  following 
accounts  in  recording  the  May  transactions  with  the  Detroit  branch. 

Branch  Stock  (Memorandum) 

Goods  Sent  to  Branch  (Memorandum) 

Branch  General 

Branch  Profit  and  Loss 

Cash 

The  first  two  accounts  are  memorandum  accounts,  and  correspond  to 
the  two  memorandum  accounts  on  the  books  of  the  branch.  When  the 
head  office  sends  goods  to  the  branch,  billed  to  them  at  50  per  cent  over 
cost,  the  Branch  Stock  Account  is  debited  and  the  Goods  Sent  to  Branch 
Account  is  credited. 

Assignment  28,  Page  11 


REPORT 
DETROIT  BRANCH  FOR  MAY  1922 
STOCK' 

Goods  on  hand,  May  1 $  3,900.00 

Received  from  head  office  51,000.00 

Total $54,900.00 

Billed  price  of  goods  sold 48,300.00 

Goods  on  hand,  May  31 $  6,600.00 

SALES: 

Sales  on  account $45,300.00 

Cash  sales 3,000.00 

Total  sales  for  May $48,300.00 


CUSTOMERS  ACCOUNTS: 

Balance,  May  1 $  4,800.00 

Sold  on  account  45,300.00 

Total $50,100.00 

Collections  during  May 30,000.00 

Balance  due  from  customers  $20,100.00 

CASH: 

Cash  on  hand.  May  1 $   500.00 

Collected  from  customers 30,000.00 

Cash  sales 3,000.00 

Total   cash  received $33,500.00 

Disbursements    $  2,800.00 

Sent  to  head  office 30,000.00 

Total   cash  paid  out 32,800.00 

Cash  on  hand.  May  31 $      700.00 


Branch  Report 

Figure  2.    The  information  in  this  report  is  important,  because  it  is  the  basis  for  entries 

in  the  books  of  the  head  office. 

The  Branch  General  Account  is  debited  with  branch  sales  and  credited 
with  cash  remittances  and  branch  expenses.  The  debit  balance  of  this 
account  represents  the  investment  of  the  head  office  in  the  branch,  except 
the  stock  which  has  been  billed  to  the  branch  at  150  per  cent  of  cost.  The 
stock  value  is  recorded  in  the  Branch  Stock  Account  merely  as  a  memo- 
randum, and  will  be  referred  to  in  the  adjustments,  which  will  be  explained 
later. 

Ledger  Accounts  on  the  Books  of  the  Head  Office.  After  the  May 
transactions  have  been  entered,  including  the  facts  on  the  May  report,  the 
head  office  accounts  will  appear  thus : 


Assignment  28,  Page  12 


LEDGER  ACCOUNTS  FOR  HEAD  OFFICE 

BRANCH  STOCK  (DETROIT) 


May  1 
2 


Inventory $3,900.00 

Shipments 51,000.00 


$54,900.00 


May  31  Goods  sold 

Balance  (Inventory) 


$48,300.00 
6,600.00 

$54,900.00 


June  1  Inventory $  6,600.00 

GOODS  SENT  TO  BRANCH  (DETROIT) 


1922 

May  31  Goods  sold  

Balance  (Inventory).  . 

.  .  $48,300.00 
.  .   6,600.00 

1922 

May  1  Inventory  .  .  .  . 
2  Shipments  .  .  .  . 

June  1  Inventory  .  .  .  . 

....  $  3,900.00 
....  51,000.00 

$54,900.00 

$54,900.00 

.  .  .  .  $  6,600.00 

DETROIT  BRANCH  GENERAL 


1922 
May  1 
31 


Balance $  5,300.00 

Branch  Sales  48,300.00 


$53,600.00 


1922 

May  31  Remittance .  .  , 
Branch  Expense 
Balance  ... 


$30,000.00 

2,800.00 

20,800.00 

$53,600.00 


June  1  Balance  due  from  branch.  .  $20,800.00 

BRANCH  PROFIT  AND  LOSS 


1922 

May  31  Expenses $  2,800.00 

1922 

May  31  Sales  

$48,300.00 

Cost  of  Goods  sold  at 

branch 32,200.00 

Balance  profit  from  branch  13,300.00 

$48,300.00 

$48,300.00 

CASH 


1922 

May  31  Remittance — Detroit. 


$30,000.00 

HEAD  OFFICE  INVENTORY 


1922 

May  31  Cost  of  Goods  Sold  at 

Branch  $32,200.00 


GENERAL  PROFIT  AND  LOSS 


1922 

May  31  Branch  Profit  and  Loss. 


.  $13,300.00 


The  last  three  accounts  would  contain  other  entries  from  the  general 
transactions  of  the  business. 

Method  of  Adjusting  the  Head  Office  Accounts.  When  the  head  office 
bills  goods  to  the  branch  at  a  price  other  than  cost  it  is  necessary  to  ad- 
just the  head  office  books  in  order  to  allow  for  the  difference  between  the 
cost  of  goods  sold  and  the  price  at  which  they  were  billed  to  the  branch. 

Trace  the  entries  in  the  accounts  given  above  so  that  you  will  under- 
stand the  debits  and  credits  that  are  made.  It  would  be  well  to  set  up  the 
journal  entries  from  the  accounts  thus: 

Assignment  28,  Page  13 


Detroit  Branch  Stock  $51,000.00 

Goods  Sent  to  Branch $51,000.00 

Detroit  Branch  General  $48,300.00 

Sales $48,300.00 

You  will  find  that  these  journal  entries  are  for  the  most  part  self- 
explanatory.  There  is  one,  however,  that  requires  some  explanation, 
namely,  the  adjustment  for  goods  sold  at  the  branch. 

Detroit  Branch  Profit  and  Loss  $32,200.00 

Head  Office  Inventory  $32,200.00 

This  entry  adjusts  the  amount  of  goods  sold  at  the  branch  to  the  actual 
cost  value.  The  goods  sold  at  the  branch  amounted  to  $48,300.00.  This 
amount  represents  the  billed  price  of  goods  sold,  which  is  150  per  cent  of 
cost.  In  order  to  determine  the  cost,  or  100  per  cent,  we  must  reduce  sales 
by  33  1-3  per  cent,  thus : 

100 

$48,300.00  X =  $32,200.00,  cost  of  goods  sold. 

150 

Since  merchandise  is  recorded  in  the  head  office  books  at  cost,  this 
figure,  $32,200.00,  should  be  credited  to  the  Inventory  Account  and  debited 
to  the  Branch  Profit  and  Loss  Account.  With  the  Branch  Profit  and  Loss 
Account  debited  with  the  actual  cost  of  goods  sold,  and  with  expenses  of 
the  branch,  and  credited  with  the  sales  of  the  branch,  all  that  remains  to 
be  done  is  to  close  the  Branch  Profit  and  Loss  Account  into  the  General 
Profit  and  Loss  Account.  This  is  accomplished  by  the  following  journal 
entry : 

Detroit  Branch  Profit  and  Loss  $13,300.00 

General  Profit  and  Loss  $13,300.00 

The  same  procedure  would  be  followed  for  all  the  other  branches.  That 
is,  a  separate  Profit  and  Loss  Account  is  set  up  for  each  branch,  and  each 
of  these  is  closed  into  the  General  Profit  and  Loss  Account  after  adjust- 
ments have  been  made,  as  in  the  case  of  the  Detroit  branch. 

It  is  understood,  of  course,  that  the  head  office  will  have  its  own  sales, 
purchases,  and  expenses,  which  are  recorded  in  accounts  distinct  from  any 
branch.  These  general  nominal  accounts  will  also  be  closed  into  the  Gen- 
eral Profit  and  Loss  Account  along  with  the  profit  or  loss  of  the  ten 
branches.  If  a  Trading  Account  is  used,  then  Purchases  and  Sales  will, 
of  course,  be  closed  into  Trading,  and  Trading  will  be  closed  into  the  Gen- 
eral Profit  and  Loss  Account.  The  use  of  the  Trading  Account  is  seldom 
found,  however,  in  actual  practice  on  the  books  of  the  head  office. 

Adjustment  of  Branch  Inventories  Necessary  for  Balance  Sheet.  When 
the  head  office  sets  up  its  balance  sheet,  the  inventories  of  the  various 
branches  should  appear  at  cost. 

The  accounts  with  each  branch  kept  by  the  head  office,  however,  shows 
the  billed  value.    For  instance,  in  the  case  of  the  Detroit  branch  the  amount 

Assignment  28,  Page  14 


on  May  31  is  $6,600.  This  figure  represents  the  billed  value,  which  is 
50  per  cent  above  cost.  By  reducing  this  amount  the  Detroit  branch  inven- 
tory is  found  to  be  $4,400.00. 

Adjustment  Not  Needed  in  the  Memorandum  Accounts.  This  calcula- 
tion is  made  merely  for  the  purpose  of  detailing  the  inventory  on  the  bal- 
ance sheet  of  the  head  office.  The  Branch  Stock  and  the  Goods  Sent  to 
Branch  Accounts  each  shows  a  balance  of  $6,600.00.  Since  these  accounts 
are  purely  memorandum  accounts,  which  offset  each  other,  they  are  elimi- 
nated in  preparing  the  balance  sheet.  These  figures,  therefore,  are  not 
adjusted  but  remain  at  the  estimated  sales  valuation.  It  should  be  noted 
that  from  time  to  time  this  valuation  is  checked  up  by  physical  inventory 
to  discover  any  actual  losses  of  merchandise. 

Tie-up  Between  Branch  and  Head  Office  Books.  The  connection  be- 
tween the  two  sets  of  books  is  found  in  the  Branch  General  Account  and 
the  Head  Office  General  Account.  Refer  to  Figure  1,  and  you  will  ob- 
serve that  the  two  sets  of  books  are  reconciled  here  in  exactly  the  same 
waj^  as  they  were  in  Problem  1. 

The  Head  Office  General  Account  on  the  books  of  the  branch  has  a 
credit  balance  of  $20,800.00,  which  represents  the  accountability  of  the 
branch  to  the  head  office,  as  follows: 

Cash  on  Hand $   700.00 

Accounts  Receivable  20,100.00 


$20,800.00 


The  Branch  General  Account  on  the  books  of  the  head  office  has  a  cor- 
responding debit  balance  of  $20,800.00,  consisting  of  the  above  assets  in 
the  possession  of  the  branch.  On  the  balance  sheet  of  the  head  office  these 
assets  would  be  listed  and  classified  as  Cash,  $700.00,  and  Accounts  Re- 
ceivable, $20,100.00. 

CONSIGNMENTS 

There  are  many  business  houses  that  desire  to  extend  their  market 
and  thus  increase  sales,  but  they  do  not  consider  it  advisable  to  estai3lish 
branches.  For  a  business  house  in  Chicago  to  set  up  branches  in  other 
cities  requires  a  considerable  outlay  for  fixed  assets.  Moreover,  these 
branches  must  be  supplied  with  a  large  and  varied  stock  of  goods,  which 
necessitates  the  maintaining  of  large  inventories.  Then  too,  the  total 
overhead  of  the  business  is  increased  by  branches. 

Moreover,  it  is  easier  to  establish  agencies  thru  consignments  than  to 
supervise  branches.  As  a  result,  certain  business  houses  prefer  to  ship 
their  goods  to  local  dealers  on  consignment,  and  thus  avoid  large  expendi- 
tures which  would  be  necessary  if  they  established  and  supervised 
branches. 

Why  Some  Concerns  Sell  on  Consignment.  There  are  only  certain  kinds 
of  businesses  that  find  it  desirable  to  ship  on  consignment.  For  example, 
some  of  the  large  meat  packers  handle  all  of  their  foreign  business  by 

Assignment  28,  Page  15 


consignment.     Houses  selling  specialties,  such  as  jewelry,  oriental  rugs, 
musical  instruments,  etc.,  find  consignment  trading  advantageous. 

Some  business  concerns  use  consignments  only  for  part  of  their  sales. 
A  large  piano  house  ships  25  per  cent  of  its  pianos  on  consignment.  Large 
wholesale  seed  dealers  ship  a  large  part  of  their  goods  to  small  dealers 
on  consignment. 

Shippers  of  perishable  produce  have  also  found  it  desirable  to  ship  their 
goods  on  consignment  because  this  arrangement  keeps  the  title  to  the 
goods  in  the  hands  of  the  shipper.  This  is  desirable  from  the  standpoint 
of  the  consignee,  especially  when  there  is  an  element  of  risk  or  uncertainty. 

Consignment  trading  is  also  popular  in  businesses  whose  stock  is  mov- 
ing slowly,  or  where  the  consignee  has  a  limited  capital  on  which  to  run 
his  business. 

Method  of  Selling  on  Consignment.  Selling  on  consignment  makes  use 
of  the  store  and  equipment,  the  sales  force  and  facilities,  of  local  store- 
keepers. The  services  rendered  by  the  dealer  is  paid  for  thru  a  fixed  com- 
mission. That  is,  when  goods  are  sold  on  consignment  they  are  shipped 
to  a  merchant  handling  a  similar  or  related  line  of  goods.  The  title  to  the 
goods  is  retained  by  the  manufacturer  and  the  merchant  is  merely  his 
selling  agent.  When  the  goods  are  sold,  the  commission  and  certain  ex- 
penses are  deducted  and  the  balance  remitted  to  the  manufacturer. 

Consignor  and  Consignee — Duties  and  Rights.  The  business  or  indi- 
vidual sending  the  goods  to  be  sold  on  consignment  is  called  the  consignor. 
The  business  or  individual  to  whom  the  goods  are  sent  for  sale  under  such 
an  agreement  is  called  the  consignee  or  factor.  The  consignee  is  an  agent 
of  the  consignor.  As  such,  he  is  usually  delegated  with  the  restricted 
powers  of  a  special  agent.  He  acts  for  the  principal  (the  consignor)  only 
in  so  far  as  it  is  necessary  to  act  for  the  purpose  of  receiving,  handling, 
protecting,  selling,  delivering,  collecting,  and  remitting  to  the  consignor 
for  the  goods  sent  to  him. 

Meaning  of  Del  Credere  Agent.  If  the  consignor  stipulates  that  the 
goods  may  be  sold  on  account,  the  consignee  is  not  liable  for  bad  debts  in- 
curred if  he  uses  the  same  care  in  extending  credit  that  he  would  for  his 
own  goods.  If  the  consignor  specifies  that  goods  are  to  be  sold  for  cash, 
the  consignee  is  liable  for  any  loss  resulting  from  bad  debts.  \Vlien  the 
consignee  thus  guarantees  the  consignor  against  loss  from  bad  debts,  the 
consignee  is  known  as  a  "del  credere"  agent. 

Title  of  Merchandise  Does  not  Pass  to  Consignee.  The  goods  handled 
by  consignment  remain  the  property  of  the  consignor  until  they  are  sold 
by  the  consignee.  Accordingly,  the  consignee  does  not  include  such  goods 
in  his  inventory  of  salable  merchandise  at  the  close  of  a  fiscal  period.  His 
balance  sheet  would  show  only  goods  that  he  holds  title  to.  The  con- 
signor, however,  does  include  such  goods  in  his  inventory,  even  tho  they 
may  be  several  hundred  miles  away  from  his  main  store. 

Main  Accounting  Problem  in  Consignments.  When  goods  are  shipped 
on  consignment,  the  accounts  of  both  the  consignor  and  consignee  should 
be  made  to  show  the  liability  of  one  to  the  other  and  the  accountability 

Assignment  28,  Page  16 


arising  as  a  result  of  the  goods  remaining  in  the  possession  of  one  party 
while  the  legal  title  rests  in  the  other.  The  main  accounting  problem, 
therefore,  includes  two  things: 

1.  Accounting  for  Inventory. 

2.  Settlement  according  to  agreement. 

Each  party  would  like  to  have  his  accounts  show  as  nearly  as  possible 
how  much  is  made  as  a  result  of  transacting  business  in  this  way.  The 
special  accounting  features  for  both  tlie  consignor  and  consignee  are  illus- 
trated in  the  following  problem : 

PROBLEM 

Illustrating  Consignment  Sales.  The  following  problem  illustrates  three 
special  accounting  features  for  consignment  sales. 

1.  Entries  on  books  of  consignee. 

2.  Account  Sales — Report  of  consignee  to  consignor. 

3.  Entries  on  books  of  consignor. 

L.  M.  Stattler,  of  Chicago,  111.,  ships  via  the  Chicago  and  Alton  R.  R., 
to  Walter  Camp,  Springfield,  111.,  a  "del  credere"  agent,  the  following  goods 
on  consignment: 

Dec.    1,  1922     6  phonographs  Style  A  @  $150.00— Received  Dec.    6 
"7  5  "  "       B  @       75.00—       "  "      12 

"     15  18  "  "       C  @       80.00—       "  "      20 

"     23  2  "  "       D  @     250.00—       "  "      28 

The  goods  are  billed  to  the  consignee  at  the  selling  price. 

The  cartage  charges  on  these  shipments  were  .$25.00.  Insurance 
charges  were  $15.00.  Both  of  these  were  paid  by  Mr.  Stattler  on  De- 
cember 31. 

When  Mr.  Camp  received  the  goods,  he  paid  freight  and  drayage  as 
follows : 

Dec.    &  $15.00 

Dec.  12  14.00 

Mr.  Camp  made  sales  as  follows: 

Weeks  ending  Number 

Dec.    9  4 

Dec.  16  1 

4 
Dec.  23  1 

5 
Dec.  30  2 

All  sales  were  for  cash  except  the  following,  which  were  sold  to  cus- 
tomers on  open  account. 

Week  ending  Dec.  16  4  phonographs  Style  B— $300.00 
Week  ending  Dec.  23  5  "  "       C—  400.00 

On  Dec.  29  Mr.  Camp  collected  $475.00  from  customers. 

Assignment  28,  Page  17 


Dec. 

20 

$42.00 

Dec. 

28 

4.00 

Style 

Unit  Price 

A 

$150.00 

A 

150.00 

B 

75.00 

A 

150.00 

C 

80.00 

D 

250.00 

On  Dec.  31  Mr.  Camp  had  on  hand  1  phonograph  of  Style  B  and  13 
phonographs  of  Style  C,  with  a  total  value  of  $1,115.00. 

According  to  the  agreement,  Mr.  Camp  is  to  receive  a  commission  of 
5  per  cent  of  gross  sales.  The  commission,  freight,  and  drayage  charges 
are  to  be  deducted  on  December  31  at  time  of  submitting  the  account 
sales.  Mr.  Camp  is  required  to  remit  all  cash  collected,  less  the  deduc- 
tions allowed  by  the  agreement. 

The  cost  of  each  style  of  phonograph  is  as  follows:  A,  $75.00,  B, 
$40.00,  C,  $50.00,  D,  $150.00. 

Entries  on  the  Books  of  the  Consignee.  There  are  two  methods  that 
may  be  followed  in  making  entries  on  the  books  of  the  consignee.  They 
are  as  follows: 

Method  One.  This  method  reqviires  no  entry  in  the  general  ledger  for  goods 
received  by  the  consignee.    A  record  is  kept  only  in  a  memorandum  book. 

An  account  called  Current  Account  is  opened  on  the  general  ledger  with  the 
consignor.  This  account  is  charged  with  all  expenses  of  the  consignment.  It  is 
credited  with  sales.  When  settlement  is  made  this  account  is  debited  and  Cash  is 
credited. 

If  settlement  is  not  made  in  full,  the  balance  is  usually  transferred  to  a 
personal  account  with  the  consignor,  since  the  consignor  is  personally  liable  for 
the  amount. 

Method  Two.  The  second  method  makes  use  of  two  memorandum  accounts 
on  the  general  ledger  of  the  consignee.  When  goods  are  received,  Consignment 
Account  is  debited  and  Goods  Received  on  Consignments  is  credited.  At  the  end 
of  the  month,  the  memorandum  accounts  are  closed. 

The  Current  Account  is  set  up  on  the  general  ledger,  and  is  operated  as  in 
Method  One. 

The  consignment  accounts  will,  of  course,  be  kept  entirely  separate 
from  the  other  accounts  of  the  business,  in  which  are  recorded  the  trans- 
actions not  connected  with  the  consignment. 

The  accounts  of  Walter  Camp,  which  are  kept  according  to  Method 
One,  appear  as  follows: 


ACCOUNTS  OF  WALTER  CAMP 


Consignor 

,  Current 

1922 

1922 

Dec. 

6 

Freight  and  Drayage  .  . 

.  $   15.00 

Dec. 

9 

Sales 

12 

Freight  and  Drayage  .  . 

14,00 

16 

Sales 

20 

Freight  and  Drayage  .  . 

42 .  00 

23 

Sales 

28 

Freight  and  Drayage  .  . 

4.00 

30 

Sales 

31 

Commission 

Cash  to  L.  M.  Stattler. 
Balance  to  Consignor, 
Personal  Account  .  . 

105.00 
.  1,695.00 

225.00 

$2,100.00 

for  week $  600.00 

for  week 450.00 

for  week 550.00 

for  week 500.00 


$2,100.00 


Assignment  28,  Page  18 


CASH 


1922 

Dec.  9 
16 
23 
29 
30 

Cash  sales  

Cash  sales  

Cash  sales  

Collected  from  customers  . 
Cash  sales   

1922 
$600.00   Dec.  6 
150.00      12 
150.00      20 
475.00      28 
500.00      31 

CUSTOMERS 

Freight  and  Drayage.  .  . 
Freight  and  Drayage  .  .  . 
Freight  and  Drayage  .  .  . 
Freight  and  Drayage  .  .  . 
Check  to  L.  M.  Stattler  . 

$   15.00 

14.00 

42.00 

4.00 

1,695.00 

1922 
Dec. 16 
23 

Sales  on  account  

Sales  on  account  

1922 
$300.00   Dec. 29 
400.00 

COMMISSION 

Collected  from  customers. 

$475.00 

1922 

Dec. 31  5  per  cent  commission 


$105.00 


CONSIGNOR,  PERSONAL 


1922 

Dec.  31  Balance  from  Current 
Account 


$225.00 


These  accounts  represent  only  those  transactions  that  have  to  do  with 
this  one  consignment.  For  this  reason,  these  accounts  should  be  kept  in 
a  separate  part  of  the  consignee's  ledger;  in  fact,  every  consignment 
should  have  its  separate  set  of  accounts.  The  Commission  Account  is 
finally  closed  into  the  consignee's  Profit  and  Loss  Account,  as  a  part  of  his 
income  for  the  period. 

Account  Sales — Report  of  Consignee  to  Consignor.  At  regular  intervals, 
monthly  or  weekly,  the  consignee  makes  a  complete  report  of  the  consign- 
ment trading  to  the  consignor.  Tn  the  above  case  the  report  is  rendered 
monthly.  This  report  is  called  an  account  sales.  It  shows  the  quantity 
and  value  of  the  merchandise  received;  how  these  goods  were  disposed 
of ;  the  selling  price  per  unit ;  the  total  selling  price,  and  goods  remaining 
unsold  or  which  had  been  returned  to  the  consignor.  Figure  3  presents 
a  typical  account  sales. 

Entries  on  the  Books  of  the  Consignor.  The  consignor  may  also  adopt 
one  of  two  methods  for  handling  his  consignment  transactions.  The  two 
methods  are  very  similar  to  those  given  for  the  consignee  except  that  they 
are  mentioned  in  the  opposite  order. 

Method  One.  When  goods  are  billed  at  a  price  other  than  cost,  memorandum 
Accounts  are  set  up  for  all  shipments  made  on  consignment.  The  amount  billed, 
usually  the  selling  price  of  goods  shipped,  is  charged  to  a  Consignment  Account 
and  credited  to  a  Goods  Sent  in  Consignment  Account. 

The  memorandum  accounts  are  used  because  the  billing  price  consists  of 
two  elements;  the  cost  and  the  anticipated  profit.  The  billed  price  is  therefore 
held  in  suspense  in  the  memorandum  accounts  until  the  goods  have  been  sold. 

Method  Two.  When  goods  are  billed  at  cost  there  is  no  necessity  for  the 
memorandum  accounts.  In  this  case  a  Consignment  Account  is  charged  with  the 
goods  at  cost  and  the  Purchase  or  Inventory  Accoimt  credited  directly. 


Assignment  28,  Page  19 


ACCOUNT  SALES 

of 

Phonographs  received  via  C.  &  A.  R.  R.  from 

L.  M.  STATTLER,  Chicago,  111. 

CONSIGNEE— Walter  Camp  Springfield,  111. 

December  31,  1922. 

Shipments  received: 

Dec   6-6  Style  A @  $150.00  $  900.00 

12  -  5  Style  B @  75.00  375.00 

20  -  18  Style  C @  80.00  1.440.00 

28  -  2  Style  D @  250.00  500.00 

$3,215.00 

Goods  on  hand: 

Dec.  31  -  1  phonograph  Style  B @     75.00   $   75.00 

-  13  phonographs  Style  C  @  80.00    1.040.00   1,115.00 

Goods  Sold $2,100.00 

Sales  Summary: 
Week  ending  Dec.  9 

4  Style  A @    $150.00    $600.00 

Week  ending  Dec.  16 

1  Style  A @     150.00     150.00 

4  Style  B @     75.00     300.00 

Week  ending  Dec.  23 

1  Style  A @     150.00     150.00 

5  Style  C @     80.00     400.00 

Week  ending  Dec.  30 

2  Style  D @  250.00     500.00 

$2,100.00 
Charges: 

Freight  and  Drayage $  75.00 

Commission  5% 105.00 

180.00 

Total  due  L.   M.   Stattler $1,920.00 

Cash  remitted 1,695.00 

Balance  due  L.   M.    Stattler $     225.00 


Account  S.ales 

Figure  3.    This  report  contains  all  the  details  set  up  in  the  typical  problem.     For  this 
reason  it  should  be  very  closely  analyzed. 


In  the  problem  being  considered  the  first  method  is  used,  since  the 
goods  were  billed  at  the  selling  price. 

The  following  accounts  show  the  records  of  L.  M.  Stattler. 

These  last  four  accounts  would  also  receive  entries  for  transactions  not 
related  to  the  consignment. 


Assignment  28,  Page  20 


ACCOUNTS  OF  L.  M.  STATTLER 

CONSIGNMENT  (WALTER  CAMP) 


1922 

Dec.  1  Shipment 

7  Shipment 

15  Shipment 

23  Shipment 


1923  Jan.  1  Balance 


$  900.00 

375.00 

1,440.00 

500.00 

$3,215.00 


.  .  $1,115.00 

GOODS  SENT  ON  CONSIGNMENT 


1922 

Dec.  31  Consignment  sales.  .  .  $  2,100.00 
Balance  carried  down.  .  1,115.00 


S  3,215.00 


1922 

Dec.  31  Consignment  sales $2,100.00 

Balance  carried  down  .  .  .   1,115.00 


$3,215.00 


1922 

Dec.  1  Shipment $    900.00 

7  Shipment 375.00 

15  Shipment 1,440.00 

23  Shipment 500.00 


1923 

Jan.   1  Balance 


$3,215.00 
$1,115.00 


CONSIGNMENT  EXPENSE 


1922 

Dec.  31  Cartage $  25.00 

Insurance 15.00 

Commission  105.00 

Freight  and  Drayage.  .  .  .  75.00 


$  220.00 


1922 

Dec.  31  Closed  to  Consignment 

Profit  and  Loss  ...  $  220.00 


CONSIGNEE,  PERSONAL 


1922 

Dec.  31  Balance  Due. 


$225.00 


CONSIGNMENT  PROFIT  AND  LOSS 

1922 

Dec.  31 

Consignment  expense.  ...  $  220.00 

Cost  of  shipments 1,850.00 

Balance  carried  to  general 

profit  and  loss 720.00 

1922 

Dec.  31  Sales  

.  $2 

100 
690 

nn 

Current  inventory  . 

00 

$2,790.00 

$2 

790 

GO 

CASH 


1922 

Dec.  31  Received  from  Walter  Camp.  $1,695.00 


1922 

Dec.  31  Cartage  . 
Insurance 


$25.00 
15.00 


PURCHASES 


1922 


1922 

Dec.  31  Cost  of  shipments 


$1,850.00 


Assignment  28,  Page  21 


GENERAL  PROFIT  AND  LOSS 


1922 


Previous  inventory 
Purchases 


1922 

Dec.  31  Consignment  profit  and 
loss 

Current  inventory  .  .  . 

Other  sales  


$720.00 


INVENTORY 


1922 

Dec.  31  Previous  inventory  .  . 

Current  inventory  on 
consignment  on  hand. 


$690.00 


1922 
Dec.  31 


Closed  to  Trading 


You  will  note  that  the  consignor  charges  the  Consignment  Account 
with  the  selhng  price  of  the  goods  shipped,  and  credits  a  Goods  Sent  on 
Consignment  Account.  These  are  purel3^  memorandum  accounts.  At  the 
end  of  the  period  when  lie  receives  the  account  sales,  he  debits  Goods 
Sent  on  Consignment  and  credits  Consignment  Account  with  $2,100.00, 
the  amount  of  sales.  The  balance,  carried  down,  represents  the  goods  in 
possession  of  the  consignee,  valued  at  the  billed  or  selling  price. 

From  the  account  sales  L.  M.  Stattler  makes  the  following  entry: 


Cash 

Consignment  Expense 

Freight  and  Drayage 

Consignee,  Personal 

Consignment  Profit  and  Loss 


$1,695.00 

105.00 

75.00 

225.00 


$2,100.00 


The  debit  in  the  Consignee's  Personal  Account  remains  until  the  cash  is 
received.  The  $225.00  represents  the  amount  still  due  from  customers. 
Since  Walter  Camp  is  a  ''del  credere"  agent  he  is  held  responsible  for  this 
amount  and  he  must  collect.  That  is  why  he  is  charged  on  the  books  of 
L.  M.  Stattler  instead  of  the  customers. 

A  special  Consignment  Expense  Account  is  charged  with  all  consign- 
ment expenses.  This  account  is  closed  into  a  Consignment  Profit  and  Loss 
Account. 

Closing  Entries  on  the  Books  of  the  Consignor.  At  the  end  of  the  month 
the  consignor  will  close  his  consignment  accounts  in  order  to  determine 
the  profit  realized  from  the  various  consignments  and  the  profit  realized 
from  other  operations. 

In  order  that  you  may  see  more  clearly  how  the  consignment  accounts 
are  closed  by  the  consignor,  follow  Mr.  Stattler' s  closing  entries  journal- 
ized below  and  you  will  be  able  to  understand  the  entries  in  the  accounts 
given  above. 

1922 

Dec.  31  Consignment  Profit  and  Loss $  220.00 

Consignment  Expense $  220.00 

To  close  Consignment  Expense  Account 

Consignment  Profit  and  Loss  $1,850.00 

Purchases $1,850.00 

To  adjust  the  Purchase  Account  for 
cost  of  shipments. 


Consignment  Profit  and  Loss  .... 
General  Profit  and  Loss  .  .  .  . 
To  close  Consignment  Profit  and 
Loss  into  General  Profit  and  Loss 
Account. 


$     720.00 


.$     720.00 


Assignment  28,  Page  22 


The  entries  made  in  Consignment  Profit  and  Loss  Account  summarize 
the  transactions  connected  with  the  consignment.  Notice  that  it  is  charged 
with  the  cost  of  the  shipments  and  credited  with  the  sales  made  by  the 
consignee  and  the  cost  value  of  goods  in  possession  of  the  consignee.  The 
balance  represents  the  net  profit  realized  on  this  one  consignment. 

A  similar  Profit  and  I^oss  Account  is  used  to  summarize  the  transac- 
tions for  every  other  consignment.  Then  all  these  consignment  Profit  and 
Loss  Accounts  are  closed  into  the  general  profit  and  loss  account. 

The  Balance  Sheet  and  Profit  and  Loss  Statement  of  the  Consignor. 

When  Mr.  Stattler  prepares  his  balance  sheet,  he  will  not  show  the  two 
memorandum  accounts,  Consignment  and  Goods  Sent  on  Consignment. 
Instead,  he  will  show  the  amount  of  goods  in  possession  of  the  consignee 
at  cost.  In  this  case,  the  amount  is  $690.00.  This  inventory  is,  of  course, 
a  part  of  his  regular  inventory,  but  it  should  be  shown  separate  from  the 
goods  in  his  own  possession. 

If  Mr.  Stattler  has  shipped  goods  to  numerous  consignees,  the  value  of 
goods  in  possession  of  all  the  consignees  may  be  shown  in  total  under  the 
title  "Goods  on  Consignment." 

In  the  Profit  and  Loss  Statement  all  income  from  sales  on  consignment 
will  be  sho\vn  either  in  detail,  so  much  from  each  consigTiment,  or  in  total 
for  all  consignment  sales.  In  either  case,  the  income  from  consignment 
sales  is  shown  entirely  separate  from  the  income  realized  on  regular  sales. 

The  Balance  Sheet  and  the  Profit  and  Loss  Statement  of  the  Consignee. 

Since  the  consignee  is  merely  an  agent,  he  does  not  hold  title  to  the  mer- 
chandise in  his  possession.  For  this  reason,  Mr.  Camp  should  not  include 
the  $690.00  inventory  in  his  balance  sheet.  Only  goods  that  he  has  bought 
outright  are  listed  under  his  inventory. 

His  income  from  consignments  is  simply  the  commission  he  has  earned. 
This  income  should  appear  as  a  separate  item  on  his  profit  and  loss  state- 
ment. It  should  never  be  included  with  profits  realized  from  sales  of  his 
regular  stock. 

MERCHANDISE  BROKERS 

In  concluding  this  discussion  on  the  accounting  procedure  for  special 
selling  agencies,  brief  mention  is  made  of  merchandise  brokers.  These 
brokers  act  as  agents,  or  middlemen,  between  the  selling  business  and 
customers. 

Certain  business  houses  prefer  to  sell  thru  brokers,  because  it  reduces 
their  sales  promotion  expenses  to  a  minimum.  It  also  eliminates  some  of 
the  difficult  problems  of  marketing  their  goods.  Moreover,  it  helps  them 
keep  in  closer  touch  with  the  fluctuations  in  prices  and  the  demands  of 
distant  markets.  A  coffee  or  fruit  producer,  for  instance,  can  employ 
brokers  in  Chicago  and  New  York,  who  report  daily  on  the  condition  of  the 
market.  The  broker  will  advise  his  principal  as  to  the  best  time  for  sell- 
ing his  goods. 

Assignment  28,  Page  23 


Duties  and  Rights  of  the  Broker.  The  broker  is  expected  to  sell  goods 
at  the  best  price  possible.  He  merely  negotiates  the  sale  or  contract  of 
sale.  He  does  not  handle  any  of  the  goods  he  sells.  At  the  end  of  the  day 
or  week  the  broker  reports  his  sales  to  the  merchant.  Goods  are  then 
shipped  to  customers  directly. 

He  receives  a  fee  or  a  commission  for  his  sales.  This  commission  ia 
earned  when  the  sale  is  completed,  except  when  the  agreement  specifies 
otherwise. 

BOOKS  OF  THE  BROKER 

The  broker  will,  therefore,  keep  a  duplicate  of  all  sales,  orders,  or  con- 
tracts from  which  he  makes  up  his  report.  The  amount  of  commissions 
earned  should  be  charged  to  an  Accounts  Receivable  Account  with  his 
principal. 

In  some  cases  the  broker  also  makes  collections  from  customers.  This, 
however,  would  be  specifically  stated  in  the  agreement.  If  the  broker  is 
expected  to  collect,  he  will  receive  a  duplicate  of  the  invoice  sent  to  the 
customer  by  his  principal.  These  invoices  are  then  recorded  on  the  books 
of  the  broker  as  Accounts  Receivable  from  the  customer,  and  Accounts 
Payable  to  the  principal.  When  collections  are  made,  he  deducts  his  com- 
missions and  any  expense,  and  remits  the  balance  to  his  principal. 

Books  of  the  Principal.  If  the  principal  makes  collections  from  cus- 
tomers, he  will  record  all  sales  made  thru  the  broker  as  regular  Accounts 
Receivable.  If  the  broker  collects,  the  principal  opens  an  account  on  his 
books  with  the  broker  only,  to  which  all  sales  to  customers  are  charged. 
The  corresponding  credit  is  to  the  Sales  Account.  He  also  credits  the 
broker's  account  with  commissions  due  and  debits  Selling  Expense  with 
the  same  amount.  As  money  is  received  from  the  broker,  his  account  is 
credited  and  cash  is  debited. 

MAIN  POINTS  IN  THIS  ASSIGNMENT 

The  problems  used  as  illustrations  in  this  assignment  indicate  how 
accounting  practice  must  be  adjusted  to  meet  the  needs  of  special  types 
of  business. 

The  special  accounting  features  of  selling  agencies  have  been  illus- 
trated in  this  assignment: 

Branches. 
Consignments. 
Merchandise  Brokers. 

In  all  three  forms  of  trading,  sales  are  made  indirectly;  that  is,  thru 
a  third  party,  called  the  agent.  The  accounting  procedure,  therefore,  must 
take  into  consideration  two  problems: 

1.  Two  sets  of  records  must  be  kept,  one  by  the  agent  and  one  by  the 
principal.    These  two  records  must  be  periodically  reconciled. 

2.  Correct  accounting  must  be  made  for  inventories,  which  are  in  the 
possession  of  the  agent,  but  are  not  his  property. 

Assijrnment  28,  Page  24 


In  explaining  these  two  special  accounting  features  for  agencies  we 
have  considered  the  following  points: 

First:    Advantages  of  selling  thru  branches: 

(a)  Local  trade  can  be  built  up. 

(b)  Slowly    moving    goods    can    be    transferred    easily    between 
branches. 

(c)  Credits  and  collections  can  be  controlled. 

Second :    Two  methods  of  keeping  books  for  head  office : 

(a)  By  duplicate  set  of  books. 

(b)  By  building  up  the  records  from  periodical  reports. 

Third:    Two  problems  were  given  to  illustrate  branch  accounting: 

(a)  When  goods  are  billed  to  branch  at  cost. 

(b)  When  goods  are  l)illed  at  selling  price. 

Fourth :  When  goods  are  billed  at  cost,  reconciliation  is  made  thru : 

(a)  Head  Office  Account  of  the  branch. 

(b)  Branch  Account  of  the  head  office. 

Fifth :    When  goods  are  billed   at  selling  price,  the  reconciliation  is 
made  thru: 

(a)  Head  Office  General  Account  of  the  branch. 

(b)  Branch  General  Account  of  the  head  office. 

Sixth:    Adjustment  must  be  made  on  head  office  books  at  time  of  clos- 
ing, for  the  goods  shipped  to  the  branch: 

Billed  values  are  kept  in  Memorandum  Accounts  and  adjust- 
ments are  made  for  reducing  billed  price  to  cost. 

Seventh:     Advantages  of  Consignment  Sales: 

(a)  Consignee  avoids  risk  for  perishable  goods. 

(b)  Consignee  can  run  his  business  on  a  limited  capital. 

Eighth:     Main  Accounting  Problems  in  Consignments: 

(a)  To  provide  accurate  accounting  for  inventory. 

(b)  To  keep  accurate  records  so  that  the  consignment  agreement 
can  be  satisfactorily  settled. 

Ninth :    Three  parts  to  a  consignment  problem : 

(a)  Entries  on  the  books  of  the  consignee. 

(b)  Account  Sales — Report  of  Consignee  to  Consignor. 

(c)  Entries  on  the  books  of  the  Consignor. 

Tenth:     Special  accounting  for  goods  sold  by  merchandise  brokers: 

(a)  Commissions. 

(b)  Accounts  Receivable  (on  books  of  principal  when  he  collects 
from  customers). 

(c)  Account  with  broker  when  he  is  expected  to  collect  from  cus- 
tomers. 

Assignment  28,  Page  25 


PROBLEMS  TO  BE  SOLVED  WITH  THIS  ASSIGNMENT 

1.  On  page  3  of  the  assignment  you  were  given  transactions  for  the 
Toledo  branch  of  the  Smith  Mercantile  Company.  It  was  mentioned  that 
two  other  branches  were  established,  one  in  Chicago  and  the  other  in 
Denver. 

We  shall  now  give  you  the  transactions  for  the  Denver  branch,  for 
January,  1922. 

On  January  3,  1922,  the  Denver  branch  received  from  the  head  office 
the  following: 

Cash S  8,000.00 

Merchandise  (valued  at  cost  price).  .  65,000.00 

During  January  the  branch  sold  to  customers  on  account  $48,000.00, 
and  made  cash  sales  amounting  to  $6,000.00.  During  the  month  the  branch 
manager  collected  $20,050.00.  The  expenses  at  the  branch  for  January, 
including  freight,  were  $4,100.00.  The  manager  receives  as  salary  1  per 
cent  of  gross  sales.  On  January  10  the  manager  purchased  two  delivery 
trucks  at  $2,000.00  each. 

On  January  31  he  sent  $22,000.00  to  the  head  office.  On  that  date  he 
had  merchandise  on  hand  valued  at  $24,500.00. 

Prepare  the  following  as  your  solution : 

(a)  Journal  Entries  for  bringing  all  the  January  transactions  in  the 
})ooks  of  the  Denver  branch. 

(b)  Prepare  the  Profit  and  Loss  and  Head  Office  Accounts  on  books  of 
the  branch  after  all  journal  entries  have  been  posted  and  the  books  of  the 
branch  have  been  closed. 

(c)  Show  the  Denver  Branch  Account  on  the  books  of  the  head  office 
as  it  would  appear  on  January  31,  after  all  entries  have  been  made. 

(d)  Analyze  the  debit  balance  in  the  Denver  Branch  Account  to  show 
the  assets  at  the  branch,  represented  by  this  balance. 

2.  Problem  2  is  based  on  the  general  situation  described  on  page  9  of 
the  assignment,  for  the  company  in  Chicago  dealing  in  automobile  acces- 
sories. This  company  operates  another  of  its  branches  at  Atlanta,  Ga. 
Goods  are  billed  to  the  Atlanta  branch  on  the  same  basis  as  shipments 
made  to  the  Detroit  branch.  On  May  31,  1922,  the  branch  manager  at 
Atlanta  sent  the  monthly  report  appearing  on  page  27  to  the  head  office. 

(a)  From  this  report,  prepare  the  following  ledger  accounts  on  the 
books  of  the  head  office: 

Goods  Sent  to  Branch  (Atlanta). 
Atlanta  Branch  General. 

•  (b)  Prepare  a  statement  showing  the  actual  profit  made  by  the  Atlanta 
branch. 

Assignment  28,  Page  26 


REPORT 
ATLANTA  BRANCH  FOR  MAY  1922 
STOCK: 

Goods  on  hand,  May  1 .  .  . $  5.100.00 

Received  from  head  office  39,000.00 

Total $44,100.00 

Billed  price  of  goods  sold 28,800.00 

Goods  on.  hand  May  31 $15,300.00 


SALES; 

Sales  on  account $25,300  00 

Cash  sales 3,500.00 

Total  sales  for  May $28,800.00 

CUSTOMERS  ACCOUNTS: 

Balance  May  1 $  9,500.00 

Sold  on  Account  25,300.00 

Total $34,800.00 

Collections  during  May 21,000.00 

Balance  due  from  customers  $13,800.00 

CASH: 

Cash  on  hand  May  1 $  1,100.00 

Collected  from  customers 21,000.00 

Cash  sales 3,500.00 

Total  cash  received $25,600.00 

Disbursements  for  expenses $  2,200.00 

Sent  to  head  office 22,000.00 

Total  cash  paid  out 24,200.00 

Cash  on  hand  May  31. $  1,400.00 


3.  On  page  17  of  the  assignment  a  typical  consignment  problem  was 
presented.  Refer  to  it  at  this  time  so  that  you  will  get  the  setting  for 
Problem  3. 

L.  M.  Stattler,  of  Chicago,  also  shipped  pianos  at  selling  price  on  con- 
signment to  A.  C.  Barton,  a  "del  credere"  agent,  at  Ames,  Iowa. 

On  January  4,  1923,  Mr.  Barton  received,  via  the  C.  &  N.  W.  R.  R.,  a 
carload  of  pianos,  of  two  styles : 

style  A  Style  B 

12     @$350.00  6     @$600.00 

Insurance  charges  on  this  shipment  amounted  to  $12.00.  Boxing 
charges  were  $60.00.  Both  of  these  items  were  paid  by  Mr.  Stattler  on 
January  3. 

On  January  5,  Mr.  Barton  paid  $85.00  freight  and  $35.00  drayage. 

Assignment  28,  Page  27 


During  January  Mr.  Barton  made  the  following  sales  on  account : 

January  8      1  Style  A 

January  11      1  Style  B 

January  15      1  Style  A 

1  Style  B 

January  23      2  Style  A 

January  30      1  Style  A 

The  customers  paid  down  25  per  cent  on  Style  A,  and  20  per  cent  on 
Style  B  at  time  of  purchase. 

The  agreement  between  L.  M.  Stattler  and  A.  C.  Barton  specified  that 
Mr.  Barton  was  to  receive  a  commission  of  10  per  cent  on  gross  sales. 
The  agreement  also  provided  that  Mr.  Barton  be  allowed  to  deduct  this 
commission,  also  freight  and  drayage  charges  paid  on  consigned  goods, 
from  gross  sales,  to  determine  the  total  amount  due  as  shown  on  the  ac- 
count sales.  At  the  end  of  each  month  Mr.  Barton  is  required  to  remit 
all  cash  collected,  less  the  deductions  allowed  by  the  agreement. 

As  your  solution  for  this  problem  prepare: 

(a)  The  account  sales  submitted  by  A.  C.  Barton  on  January  31,  1923. 

(b)  Using  the  account  sales  which  you  have  set  up  for  (a)  and  the 
facts  stated  in  the  problem,  prepare  tlie  accounts  for  L.  M.  Stattler,  cover- 
ing all  the  January  transactions,  and  the  necessary  adjustments  for 
closing. 

The  cost  of  each  piano  shipped  is  as  follows : 

style  A  $250.00 

Style  6  $400.00 


Assignment  28,  Page  28 


Higher  Accountancy 

Ol  30 

PRINCIPLES 
PRACTICE  flw/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  29 

COMPARATIVE  STATEMENTS 


A  MAN'S  knowledge  of  other  men's  experience 
may  be  just  as  important  or  more  important 
than  his  own  limited  personal  experience.  The  main 
point  is:  How  thoroly  does  he  understand  the  prin- 
ciples, the  causes  and  effects,  behind  experience 
which  account  for  the  results  obtained — whether 
they  lead  to  success  or  to  failure? 

N.  A.  HAWKINS 

Hawkins.  Gies  G  Company 

Certified  Public  Accountants 
Detroit,  Michigan 


LaSalle  Extension  University 

Chicago 


NHA-29 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
type  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting — Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright,  1922 

All  Rights  Reserved  in  All  CountriM 

LaSalle  Extension  University 

Printed, in  the  U.  S.  A. 


COMPARATIVE  STATEMENTS 

Every  person  interested  in  a  business  enterprise,  either  as  a  manager, 
stockholder,  or  creditor,  desires  a  method  of  determining  the  value  of  his 
interests  or  claims.  One  of  the  best  ways  of  obtaining  this  information  is 
thru  the  use  of  comparative  statements. 

The  changes  reflected  in  comparative  statements  reveal  the  general 
trend  of  the  business  and  show  the  factors  contributing  to  the  increase  or 
decrease  of  its  worth.  Large  fortunes,  great  financial  institutions,  and  the 
majority  of  business  enterprises  are  dependent  upon  such  certain  definite 
sources  of  information  as  an  aid  in  determining  the  steps  to  be  taken  in 
the  future. 

Comparative  statements,  prepared  especially  to  reflect  changes  between 
given  dates  or  periods,  may  be  classed  as  follows : 

Comparative  Balance  Sheets. 
Comparative  Profit  and  Loss  Statements. 
Comparative  Manufacturing  Statements. 
Comparative  Sales  Reports. 

Comparative  statements  are  invaluable  to  business  men  and  one  of  the 
principal  mediums  by  which  the  activities  of  the  larger  branches  of  in- 
dustry can  be  directed.  When  used  in  connection  with  graphic  charts  they 
are  as  essential  to  the  progress  of  industry  as  the  mariner's  compass  on  a 
ship  crossing  the  sea,  since  thru  their  use  many  financial  difllculties  may 
be  avoided. 

Purpose  of  Comparative  Statements. — Comparative  statements  are  pre- 
pared primarily  for  the  use  of  the  directors  and  officers,  as  an  aid  in  direct- 
ing future  financial,  sales,  costs,  and  general  policies  of  a  company.  Other 
purposes  considered  of  equal  importance  are  those  for  the  use  of  stock, 
bond,  and  note  holders,  brokers,  etc.  As  these  arise  only  on  special  occa- 
sions they  will  be  considered  as  of  secondary  importance.  The  more  im- 
portant uses  of  a  single  statement  or  a  series  of  comparative  statements 
are  given  below: 

(  Disposition  of  Profits. 
Managerial     <  Directing  Future  Policies. 
(Expansion  and  Growth. 

FinflTirinl  J  Bond  Issues  and  Loans, 

jmanciai         {Collateral  Note  Financing. 

Special  Stockholders. 

Disposition  of  Profits. — This  is  undoubtedly  one  of  the  foremost  features 
in  all  branches  of  industry  organized  for  the  purpose  of  making  a  profit. 
If  a  company  realizes  a  fair  margin  of  profit  from  the  operations  of  a  given 
period,  the  disposition  of  the  profit  is  very  important.    For  example,  those 

NHA-29 


interested  in  the  Western  Manufacturing  Company  are  advised  that  the 
surplus  has  increased  $12,500.00  during  the  year  December  31,  1922,  while 
the  profit  amounts  to  $42,500.00.  As  a  means  of  clearly  illustrating  these 
statements  we  show  in  Figure  1  a  comparative  balance  sheet  of  the  Western 
Manufacturing  Company.  The  comparative  balance  sheet,  analysis  of  the 
Surplus  Account,  and  the  application  of  funds  statement  must  be  used  as  a 
group  to  determine  the  disposition  of  the  profits. 


THE  WESTERN  MANUFACTURING  COMPANY 
COMPARATIVE  BALANCE  SHEET,  DECEMBER  31,  1921,  and  1922 

ASSETS 

Increase 
or 

CURRENT  ASSETS                               1921  1922     *Decrease 

Cash $  15,000.00  $   10,000.00  *$  5,000.00 

Accounts  Receivable  130,000.00  125,000.00  *   5,000.00 

Notes  Receivable  50,000.00  25,000.00  *  25,000.00 

Inventories  400,000.00  630,000.00   230,000.00 

Total  Current  Assets  $595,000.00  $  790,000.00  $195,000.00 

FIXED  ASSETS 

Land    S  30,000.00  $   30,000.00 

Buildings  175,000.00  200,000.00  $  25,000.00 

Machinery  and  Equipment  80,000.00  90,000.00    10,000.00 

Less  Depreciation  *30,000.00  *40,000.00   *10,000.00 

Total  Fixed  Assets  $255,000.00  $  280,000.00  $  25,000.00 

DEFERRED  CHARGES 

Insurance,  Taxes,  Etc $  5,000.00  $    7,500.00  $  2,500.00 

$855,000.00  $1,077,500.00  $222,500.00 

LIABILITIES 
CURRENT  LIABILITIES 

Accounts  Payable  $155,000.00  $  200,000.00  $  45,000.00 

Notes  Payable  200,000.00  360,000.00   160,000.00 

Accrued  Wages  and  Taxes  20,000.00  25,000.00    5,000.00 

Total  Current  Liabilities  $375,000.00  $  585,000.00  $210,000.00 

NET  WORTH 

Capital  Stock   $300,000.00  $     300,000.00 

Surplus   180,000.00  192,500.00     $  12,500.00 

Total  Net  Worth     $480,000.00  $     492,500.00     $  12,500.00 

$855,000.00  $1,077,500.00     $222,500.00 
*Asterisks  indicate  that  the  amount  is  deducted. 

Figure  1.    Comparative  Balance  Sheet 


Comparative  Balance  Sheets — Uses. — Comparative  balance  sheets  are 
essential  in  determining  the  disposition  of  profits  and  losses  occurring  be- 
tween given  dates. 


Assignment  29,  Page  2 


In  Figure  1,  it  will  be  noted  that  altho  Cash,  Accounts  Receivable  and 
Notes  Receivable  have,  in  comparison  with  balances  of  December  31,  1921, 
decreased  in  value,  the  inventories  have  increased  to  such  an  extent  that 
the  total  decrease  of  the  other  accounts  is  absorbed,  with  a  remaining  net 
increase  of  $195,000.00.  The  fixed  assets  have  likewise  increased  $25,- 
000.00  and  also  the  deferred  charges  show  an  increase  of  $2,500.00.  Re- 
ferring to  the  current  liabilities  we  find  an  increase  of  $210,000.00,  which 
denotes  that  the  greater  part  of  the  increases  in  assets  was  due  to  bor- 
rowed capital.  The  only  amount  which  can  be  accounted  for  from  the 
operations  of  the  business  is  the  increase  in  the  Surplus  Account  in  the  net 
worth  section. 

Analysis  of  Surplus. — As  previously  mentioned,  the  profit  of  The  West- 
ern Manufacturing  Company  for  the  year  1922  amounted  to  $42,500.00. 
The  surplus  has  increased  only  $12,500.00,  hence,  the  balance  must  be 
accounted  for.  This  may  be  accomplished  thru  an  analysis  of  the  Surplus 
Account  for  the  year  of  1922,  in  Figure  2,  and  the  preparation  of  an  appli- 
cation of  funds  statement,  in  Figure  3. 


THE  WESTERN  MANUFACTURING  COMPANY 
ANALYSIS  OF  SURPLUS— YEAR  ENDED  DECEMBER  31,  1922 

Balance  at  Beginning  $180,000.00 

Add:  Profit  for  Year 42,500.00 

$222,500.00 
Deduct:   10  per  cent  Cash  Dividend  Paid  on  stock  issued 

and  Outstanding  at  June  30,   1922 30,000.00 

Balance  at  December  31,   1922   $192,500.00 


Figure  2.    Analysis  of  Surplus 

The  Application  of  Funds  Statement. — This  is  very  easily  constructed 
and  is  of  great  value  in  analyzing  the  balance  sheet  and  profit  and  loss 
statement.  It  is  composed  of  the  current  assets  less  current  liabilities,  to 
which  must  be  added  the  deferred  charges.  TTie  next  section,  funds  pro- 
vided, is  composed  of  the  net  profit  and  reserve  for  depreciation.  The 
funds  disbursed  section  contains  the  payment  of  cash  dividends  and  pur- 
chase of  fixed  properties,  etc. 

This  statement  permits  showing  the  disposition  of  earnings  thru  an 
actual  distribution  among  the  various  accounts,  and  presents  in  a  condensed 
form  the  actual  changes  occurring  during  the  period. 

As  a  means  of  showing  the  application  of  the  increase  in  net  worth 
amounting  to  $12,500.00,  we  present  the  following: 


Assignment  29,  Page  3 


THE  WESTERN  MANUFACTURING  COMPANY 
APPLICATION  OF  FUNDS  STATEMENT— YEAR  ENDED  DECEMBER  31,  1922 

Increase 
1921  1922  or  Decrease 

Current  Assets       $595,000.00     $790,000.00     $195,000.00 

Current  Liabilities     375,000.00       585,000.00      210,000.00 

$220,000.00     $205,000.00     $  15,000.00 
Deferred  Charges   5,000.00  7,500.00  2,500.00 

Working  Capital $225,000.00     $212,500.00     $  12,500.00 

FUNDS  PROVIDED 

Profit  for  Period $  42,500.00 

Reserve  for  Depreciation     12,250.00 

FDNDS  DISBURSED  $  54,750.00 

Cash  Dividends $  30,000.00 

Purchase  of  Fixed  Properties     35,000.00 

Replacements  Charged  to  Reserve  for  Depreciation  2,250.00     $  67,250.00 

Decrease  in  Working  Capital    $  12,500.00 


Figure  3.    Application  of  Funds  Statement- 

As  shown  by  the  application  of  funds  statement,  the  profits,  amounting 
to  $42,500.00,  were  expended  as  follows: 


Cash  Dividends  

Part  Payment  on  Purchase  of  Property 


$30,000.00 
12,500.00 

$42,500.00 


The  only  method  of  determining  the  disposition  of  profits  for  a  given 
period  is  by  the  use  of  a  comparative  balance  sheet,  an  analysis  of  surplus, 
and  an  application  of  funds  statement.  The  surplus  and  application  of 
funds  statement  serve  merely  as  a  medium  for  stating  clearly  the  disposi- 
tion of  the  profits  earned. 

The  real  value  of  comparative  statements  is  dependent  upon  their  use 
as  a  group,  as  in  many  instances  the  comparative  statement  of  profit  and 
loss  must  be  used  in  connection  with  the  comparative  balance  sheet  to  be 
of  any  real  value.  The  comparative  profit  and  loss  statement  will  be  in- 
troduced in  a  later  section  of  this  assignment. 

Directing  Future  Policies. — If  the  management  of  the  Western  Manu- 
facturing Company  has,  upon  careful  consideration,  decided  to  increase 
sales,  the  comparative  balance  sheet  would  serve  as  an  aid  in  determining 
the  available  working  capital.  The  increase  in  net  worth  due  to  profits 
on  a  certain  schedule  of  sales  and  other  features  would  be  invaluable  in 
determining  the  possible  increase  in  the  sales  schedule  with  the  present 
capital  and  manufacturing  equipment.  This  may  be  clearly  illustrated 
in  Figure  4. 


Assignment  29,  Page  4 


Current  Assets  

Decemb 
1921 
$595,000.00 

er  31 

1922 

$790,000.00 

585,000.00 

Current  Liabilities  

375,000.00 

Add:  Deferred  Charges  

Total  Working  Capital  

$220,000.00 
5,000.00 

$205,000.00 
7,500.00 

$225  000  00 

$212,500.00 

Net  Sales  

$442,000.00 

$540,000.00 

Figure  4.    Statement  of  Working  Capital 

During  the  year  of  1921  the  company  sold  $442,000.00  of  merchandise 
on  working  capital  amounting  to  $225,000.00.  The  1922  sales  amounted 
to  $540,000.00  on  a  capital  of  $212,500.00.  The  sales  increased  $98,000.00 
on  working  capital  of  $12,500.00  less  than  the  prior  year.  If  the  corpora- 
tion could  sell  more  merchandise  on  a  smaller  amount  of  working  capital, 
the  impression  is  at  once  formed  that  a  still  greater  increase  in  sales  may 
be  effected  without  necessitating  additional  working  capital. 

When  a  company  retains  over  a  period  of  years  statistics  prepared  from 
comparative  statements,  the  facts  may  be  acquired  concerning  maximum 
production  on  a  given  capital,  or  a  standard  amount  of  capital  may  be  de- 
termined for  a  certain  volume  of  sales. 

Expansion  and  Growth. — Altho  "expansion  and  growth"  are  closely 
allied  with  "directing  future  policies,"  they  may,  in  a  measure,  be  dependent 
upon  past  earnings  and  activities.  "Directing  future  policies"  pertains  to 
policies  which  may  be  adopted  and  later  prove  to  be  of  no  value,  while 
"expansion  and  growth"  usually  designates  an  actual  condition.  A  com- 
parison of  costs  may  result  in  discontinuing  that  part  of  the  enterprise 
which  will  not  yield  a  fair  return  on  the  time  and  money  invested.  Like- 
wise, a  comparison  of  departmental  earnings  may  result  in  a  change  of  the 
activities  of  a  department. 

An  increase  in  schedule  of  sales  or  a  change  in  product  may  also  require 
an  increase  or  change  in  plant  and  equipment,  etc.  Thus,  if  the  Western 
Manufacturing  Company  had  operated  at  full  capacity  and  they  now  decide 
to  double  the  sales  for  the  year  of  1923  and  subsequent  years,  the  plan 
would  necessitate  the  purchase  of  additional  manufacturing  facilities.  A 
comparative  statement  would  disclose  the  maximum  production  of  the 
present  equipment  and  the  increase  in  sales  and  profits  compared  with  the 
increase  in  fixed  properties.  This  does  not  necessarily  denote  that  the 
sales  must  increase  in  proportion  to  the  increase  in  fixed  properties,  but 
there  is  a  certain  significance  attaching  to  the  relationship,  which,  in  many 
instances,  proves  to  be  of  value. 

Financing. — The  financing  of  a  corporation  thru  the  proceeds  of  an 
issue  of  bonds  and  bank  loans  requires  comprehensive  information  on  three 
distinct  phases  of  the  business  as  follows : 

Assignment  29,  Page  5 


1.  History  and  Organization. 

2.  Earnings  Record  and  Present  Financial  Condition. 

3.  Possible  Future  Expansion  and  Growth. 

Items  1  and  3  require  the  facts  obtained  by  the  combined  efforts  of 
accountants  and  engineers.  Item  2  is  purely  a  matter  of  accounting.  The 
earnings  record  is  undoubtedly  of  far  greater  importance  than  either  Item 
1  or  Item  3,  on  account  of  the  facts  which  may  be  presented  in  a  compara- 
tive statement  of  earnings  covering  a  given  period  of  years. 

Comparative  statements  covering  a  period  of  years  serve  as  a  basis 
for  determining  the  activities  of  the  corporation,  and  reveal  the  period  of 
high  and  low  earnings,  the  annual  interest  charges,  and  many  other  im- 
portant points  which  must  be  considered  in  selecting  a  conservative  invest- 
ment or  loaning  money  on  partial  or  inadequate  security. 

As  an  illustration,  the  Western  Manufacturing  Company  has  decided 
to  increase  its  production  and  capacity ;  as  a  result,  additional  funds  must 
be  acquired.  This  may  be  accomplished  thru  negotiating  an  additional 
loan  from  their  bankers,  provided  the  bankers  consider  the  amount  of  the 
security  sufficiently  large  to  warrant  an  additional  loan.  If  this  method 
is  unsuccessful,  one  remaining  method  would  be  the  mortgaging  of  the 
properties  thru  an  issue  of  bonds.  This  would  necessitate  the  preparation 
of  comparative  statements  showing  the  earnings  for  a  given  period  and 
the  financial  condition  at  the  close. 

Collateral  note  financing  is  quite  common  among  the  larger  companies. 
Occasionally  a  company  wishes  to  borrow  additional  funds  for  working 
capital  without  placing  a  general  mortgage  on  the  fixed  properties.  An  ade- 
quate amount  of  security  may  be  given  thru  an  agreement  by  the  com- 
pany to  maintain  an  average  of  current  assets  equal  at  all  times  to  one 
and  one-half  the  amount  of  the  current  liabilities.  This  plan  differs  from 
mortgage  financing,  as  the  current  assets  are  used  as  collateral  security 
for  borrowing  working  capital.  A  comparative  balance  sheet  would  enable 
the  collateral  note  holders  to  determine  the  average  maintained  over  a 
given  period  of  time. 

Stockholders. — The  owners  of  the  corporation  are  desirous  of  learning 
its  progress  during  a  given  period.  Again  the  comparative  statements 
become  the  predominating  method  of  submitting  these  facts.  With  the 
aid  of  comparative  and  other  statements  the  disposition  of  all  earnings 
can  be  readily  determined.  By  the  use  of  these  statements  the  stockhold- 
ers may  have  knowledge  of  the  disposition  of  all  funds  resulting  from  the 
operations  of  the  period. 

Preparation  of  Comparative  Balance  Sheets. — In  preparing  a  compara- 
tive balance  sheet  every  possible  precaution  must  be  exercised  in  properly 
classifying  the  amounts.  Erroneous  classification  or  lack  of  uniformity 
destroys  the  comparative  features  of  the  statement  and  renders  it  prac- 
tically worthless.  Thus,  in  preparing  comparative  balance  sheets,  uniform 
arrangement  should  be  adopted  which  can  be  used  without  deviation  at 
any  given  time  or  period.    Continued  errors  in  classification  constitute  a 

Assigfnment  29,  Page  6 


serious  difficulty  in  securing  representative  amounts,  and  if  used  for  com- 
parison or  statistical  purposes  will  result  in  a  hindrance  instead  of  an  aid 
in  future  activities. 

To  illustrate  this  point:  suppose  the  Accounts  Receivable  Account, 
amounting  to  $130,000.00,  shown  in  Figure  1,  contained  credit  balances  of 
$20,000.00,  which  in  reality  were  amounts  necessitating  the  refund  of 
cash,  or  the  same  as  the  Accounts  Payable  Account.  The  present  status 
of  Figure  1  is  as  follows 

Total  Current  Assets  $595,000.00  $790,000.00 

Total  Current  Liabilities  375,000.00   585,000.00 

Excess  of  Current  Assets  over 

Current  Liabilities  $220,000.00  $205,000.00 


Assuming  the  $20,000.00  is  given  effect  in  the  accounts,  they  would 
then  be  stated  as  follows: 

Total  Current  Assets $615,000.00  $790,000.00 

Total  Current  Liabilities  395,000.00   585,000.00 

Excess  of  Current  Assets  over 

Current  Liabilities  220,000.00  $205,000.00 


Comparing  the  amounts  for  the  purpose  of  determining  the  increase 
and  decrease,  we  have: 

Under  the  Original  Classification 

Increase  or 
1921       1922     Decrease 

Total  Current  Assets  $595,000.00  $790,000.00  $195,000.00 

Total  Current  Liabilities 375,000.00   585,000.00   210,000.00 

Under  the  Correct  Classification 

Increase  or 
1921       1922     Decrease 

Total  Current  Assets  $615,000.00  $790,000.00  $175,000.00 

Total  Current  Liabilities  395,000.00   585,000.00   190,000.00 

Under  the  original  classification  the  total  current  assets  have  increased 
$195,000.00.  This  is  not  the  true  condition.  The  actual  increase  is  $175,- 
000.00,  as  shown  under  the  correct  classification.  The  item  used  as  an 
illustration  is  comparatively  small,  but  the  same  principle  would  apply  in 
larger  amounts. 

Ordinarily  the  content  of  a  balance  sheet  is  read  in  groups.  By  this 
we  mean  that  each  group  of  assets  or  liabilities  is  considered  in  the  total. 
The  assets  grouped  under  current  assets  are  included  as  a  total  of  current 
assets.  Likewise,  all  current  liabilities  are  included  in  a  total  of  current 
liabilities.  The  total  increase  or  decrease  is  considered  in  preference  to 
the  individual  items  composing  the  total.  When  the  amounts  are  consid- 
ered in  group  classification,  the  difference,  as  explained  above,  would  not 
affect  the  comparison  in  the  same  manner  as  it  would  if  it  had  been  be- 
tween individual  items. 

Assignment  29,  Page  7 


This  is  particularly  true  when  the  graphic  chart  is  used  in  presenting 
the  financial  condition  of  a  company  at  a  given  date.  For  example,  sup- 
pose a  company  has  erroneously  classified  a  large  item  of  stationery  and 
office  supplies  as  a  part  of  the  inventory.  This  would  result  in  a  larger 
amount  of  current  assets,  as  compared  with  current  liabilities,  than  would 
otherwise  be  stated.  This  would  result  in  a  gross  misstatement  of  com- 
parisons, which,  in  the  event  of  later  comparisons,  would  prove  misleading. 
The  following  is  given  as  an  illustration  of  the  foregoing  principle  as  ap- 
plied to  the  inventory  of  The  Western  Manufacturing  Company  at  Decem- 
ber 31,  1921. 

Current  Assets  at  12/31/1921  $595,000.00 

Current  Liabilities  at  12/31/1921  375,000.00 


Excess  of  Current  Assets  over  Current  Liabilities.  .  .  $220,000.00 


The  current  assets  at  that  date  contained  items  amounting  to  $25,000.00 
which  were  erroneously  classified.  The  correct  amounts  should  be  stated 
as  follows : 

Current  Assets  at  12/31/1921  $570,000.00 

Current  Liabilities  at  12/31/1921 375,000.00 


Excess  of  Current  Assets  over  Current  Liabilities.  .  .  $195,000.00 


The  same  amount  reflected  in  a  lesser  value  of  current  assets  would, 
of  necessity,  result  in  a  greater  change  in  the  excess  of  current  assets 
over  current  liabilities.  This  principle  should  be  carefully  exercised  in  the 
preparation  of  comparative  balance  sheets. 

PRACTICAL  USES  OF  THE  COMPARATIVE  BALANCE  SHEET 

In  a  previous  section  of  this  assignment  we  pointed  out  the  value  of 
comparative  statements  as  used  for  the  following  purposes: 

1.  Managerial 

2.  Financial 

3.  Special 

We  will  now  examine  Figure  1  to  see  how  the  comparisons  would  be 
used  by  each  of  the  three  classes  mentioned. 

1.  Managerial. — The  management  of  a  company  is  interested,  prima- 
rily, in  knowing  the  amount  of  profits  for  the  year  and  the  part  retained 
in  the  business.  The  surplus  has  increased  $12,500.00,  which,  of  course,  is 
nominal,  but  shows  a  small  amount  of  progress.  The  next  important  point 
is  the  reduction  of  debt.  The  debt  has  not  been  reduced.  On  the  other 
hand  it  has  increased.  There  must  be  a  corresponding  increase  reflected 
in  the  assets.  We  find  this  to  be  true  as  the  inventories  and  fixed  assets 
show  an  increase  in  excess  of  the  increase  in  debt.  The  real  point  involved 
is  the  inventories.  Comparing  the  inventories  at  December  31,  1921,  and 
1922,  an  increase  of  $230,000.00  will  be  noted,  which,  to  a  great  extent. 

Assignment  21),  Page  8 


serves  as  an  offset  of  the  increase  of  $210,000.00  in  current  liabilities.  This 
difference  could  not  be  properly  analyzed  without  the  aid  of  a  comparative 
balance  sheet. 

2.  Financial. — How  will  the  changes  be  considered  by  the  banker,  who 
may  be,  for  example,  the  trustee,  in  case  of  an  issue  of  bonds  or  collateral 
notes  ? 

The  banker  and  other  financial  men  usually  consider  the  relation  of  the 
loan  to  the  security.  The  notes  payable  in  this  case  will  be  considered  as 
loans  from  banks.  The  banker  takes  the  statement,  Figure  1,  and  immedi- 
ately notices  the  increase  in  Accounts  Payable,  Notes  Payable,  and  Accrued 
Wages  and  Taxes  amounting  in  total  to  $210,000.00,  as  compared  with  the 
increase  of  $195,000.00  in  the  current  assets.  The  security  back  of  the 
loan  is  not  as  great  as  it  was  a  year  ago,  because  the  banker  is  usually  in- 
terested in  those  assets  which  may  be  readily  converted  into  cash  for  the 
payments  of  the  debts. 

1921        1922 

Current  Assets $595,000.00  $790,000.00 

Current  Liabilities  375,000.00   585,000.00 

Excess  of  Current  Assets  over 

Current  Liabilities  $220,000.00  $205,000.00 


The  comparative  balance  sheet  will  show  the  banker  that  the  security 
on  which  he  has  based  the  loan  has  decreased  $15,000.00  during  the  past 
year,  denoting  a  slight  change  in  the  situation  as  related  to  working 
capital. 

3.  Special. — What  is  the  real  value  to  the  stockholder?  The  stock- 
holder in  most  instances  will  take  the  same  viewpoint  as  the  manage- 
ment. What  has  been  mentioned  in  section  1  would  apply  here  equally  as 
well.  The  stockholder  is  interested  in  knowing  about  the  financial  progress 
of  the  company  during  the  period  and  the  increase  in  the  book  value  of 
the  stock.  This  is  quite  natural,  as  the  stockholder  purchases  the  stock 
for  the  amount  of  dividends  he  may  receive.  If,  after  paying  a  substantial 
dividend,  the  suri^lus  shows  an  increase  over  the  previous  year's  balance, 
the  stockholder  has  benefited  in  two  ways,  viz., — 

By  dividends  paid. 

By  increase  in  book  value  of  the  capital  stock. 

The  comparative  balance  sheet  (Figure  1)  shows  the  increase  in  surplus 
to  be  $12,500.00;   hence  it  has  furnished  valuable  information. 

A  balance  sheet  is  primarily  a  photograph  of  the  financial  condition  of 
a  business  at  a  given  date ;  hence,  where  a  company  has  decided  to  main- 
tain a  fairly  uniform  financial  condition,  or  thru  a  legal  obligation  on  ac- 
count of  losses  is  required  to  maintain  a  minimum  excess  of  current  assets 
over  current  liabilities,  the  value  of  comparison  cannot  be  too  strongly 
emphasized.  Also  the  executive  desiring  to  be  thoroly  conversant  with 
the  activities  of  the  enterprise  coming  within  his  control  can  obtain  the 

Assignment  29,  Page  9 


desired  facts  from  a  planned,  comprehensively  prepared  balance  sheet. 
With  this  statement  before  him,  he  can  visualize  the  commercial  activities 
of  the  period,  thus  obtaining  the  facts  without  unnecessary  delay. 

Abnormal  Financial  Conditions. — During  the  years  of  1917  and  1918 
many  companies  contemplated  the  m.anufacture  of  vast  quantities  of  war 
munitions  and  supplies,  and  in  preparation  for  this  work  enlarged  their 
plants,  entered  into  contracts  for  large  quantities  of  raw  materials,  and  in 
general  outlined  extensive  production  programs.  In  many  instances  this 
was  accomplished  thru  borrowed  capital.  Again  it  was  made  possible  by 
using  practically  all  of  the  working  capital.  This,  in  many  instances, 
proved  advantageous,  as  it  required  constant  attention  to  liquidation  of 
the  assets  and  eliminated  the  necessity  for  excessive  interest  charges. 
This  plan  undoubtedly  deserves  commendation,  but  when  the  demand  for 
the  product  was  discontinued  in  1919  and  1920  many  concerns  were  over- 
burdened with  large  quantities  of  raw  materials.  This  necessitated  a 
liquidation.  How  was  this  to  be  accomplished  ?  By  discontinuing  the  pur- 
chase and  receipt  of  raw  materials  and  reducing  the  stock  to  a  normal 
quantity  and  value.  This  plan  did  not,  however,  remedy  the  condition  of 
the  fixed  assets  which  had  been  affected  by  an  almost  unlimited  program 
of  construction.  Thus  while  many  corporations  were  able  to  liquidate 
their  inventories  by  careful  buying,  the  fixed  properties  remained  at  full 
value.  This  resulted  in  a  low  proportion  of  current  assets  and  an  excep- 
tionally large  amount  of  fixed  assets.  A  comparative  balance  sheet  would 
reveal  these  changes  in  the  financial  condition  which  are  seemingly  so 
important. 

Comparative  Profit  and  Loss  Statements. — Having  covered  the  require- 
ments, form,  and  preparation  of  the  comparative  balance  sheet,  we  will 
now  show  the  uses  of  the  comparative  profit  and  loss  statement. 

The  comparative  profit  and  loss  statement  serves  as  a  medium  for  com- 
paring the  operations  of  a  company  for  consecutive  or  designated  periods. 
The  periods  may  be  designated  as  annual,  monthly,  or  cumulative.  Annual 
profit  and  loss  statements  are  designed  to  show  the  comparison  between 
years,  monthly  statements  as  between  months,  and  cumulative  from  the 
beginning  of  a  period  to  a  given  date. 

The  real  need  of  the  comparative  profit  and  loss  statement  is  evidenced 
in  its  use  for  determining  prices,  eliminating  waste,  reducing  expenses,  and 
many  other  important  phases  of  business  which  it  serves  so  successfully. 

As  a  means  of  introducing  the  proper  form  of  a  comparative  profit  and 
loss  statement,  we  have  included  the  use  of  percentages  as  an  aid  in  bring- 
ing out  the  relationship  of  each  of  the  items  to  the  total. 

Percentages  and  Amounts. — From  this  point  in  the  assignment  it  will 
be  necessary  to  show  forms  and  uses  of  percentages;  hence,  a  short  dis- 
cussion follows  relative  to  their  application  in  comparative  statements. 

The  selection  of  a  method  of  presentation  is  one  for  the  individual.  In 
many  instances  the  percentage  method  is  commendable.     Again  we  find 

Assignment  29,  Page  10 


many  instances  where  amounts  are  preferred.  From  the  practical  view- 
point the  better  method  calls  for  the  unity  of  percentages  and  amounts  as 
a  means  of  presenting  a  clear,  comprehensive,  and  analytical  statement. 

Percentages  may  be  used  advantageously  as  a  means  of  showing  the 
relationship  of  certain  items  to  the  total.  They  may  also  be  used  in  com- 
paring the  relationship  of  the  items  for  more  than  one  year.  Another 
very  important  feature  is  a  comparison  of  one  group  with  another  group 
in  the  same  period.  Percentages  are  easily  applied  and  bring  about  the 
same  result  obtainable  by  the  use  of  actual  amounts. 

The  Annual  Profit  and  Loss  Statement. — The  comparative  profit  and 
loss  statement  should  be  prepared  in  a  different  form  than  the  single  profit 
and  loss  statement  as  shown  in  Assignment  2.  This  is  due  to  the  ''Increase 
or  Decrease"  column  which  is  usually  shown  on  a  comparative  statement. 
A  comparative  profit  and  loss  statement  extending  over  a  period  of  two 
years  is  shown  in  Figure  5. 

Figure  5  is  prepared  on  the  group-total  plan.  That  is,  the  cost  of  sales, 
selling,  and  general  and  administrative  expenses  are  treated  as  individual 
amounts. 

When  a  comparative  profit  and  loss  statement  is  prepared,  the  points 
of  most  interest  are  the  increases  and  decreases  and  the  percentages  of 
cost  to  the  total.  The  basis  of  percentages  is  the  amount  of  net  sales. 
This  can  best  be  illustrated  by  the  use  of  the  following  formula : 

1.00 

=  the  reciprocal  X  amount  of  the  costs  or  expenses  =  percentage. 


Net  Sales 

Applying  this  formula  to  Figure  5,  1922  column,  we  have: 
1.00 


=  .000001851 


1540,000.00 
$280,000.00  X  .00000185  =  51.85% 
Proving  this  formula  we  have  the  following: 
$280,000.00  -^  $540,000.00  =  51.85% 

The  percentages  of  one  item  or  a  group  of  items  to  the  net  sales  may 
be  derived  from  a  single  year's  statement;  that  it,  without  use  of  the 
comparison.  Some  of  the  most  interesting  facts  are  presented  in  the  in- 
crease or  decrease  column. 

Comparative  Manufacturing  Statement. — The  cost  of  manufacturing 

schedule  is  used  in  connection  with  the  following  statements: 

Figure  5.    Comparative  Statement  of  Profit  and  Loss  for  the  Years 
Ending  December  31,  1921,  and  1922. 

Figure  7.    Comparative  Statement  of  Profit  and  Loss  for  the  Years 
Ending  December  31,  1921,  and  1922. 


Assignment  29,  Page  11 


THE  WESTERN  MANUFACTURING  COMPANY 

COMPARATIVE  PROFIT  AND  LOSS  STATEMENT— YEARS  ENDING 

DECEMBER  31,  1921,  AND  1922 

Increase  or 

1921  1922     *Decrease 

SALES  $450,000.00  $550,000.00  $100,000.00 

Less  Returns  and  Allowances  8,000.00  10,000.00    2,000.00 

NET  SALES  $442,000.00  $540,000.00  $  98,000.00 

Cost  of  Sales  (Figure  6)  225,000.00  280,000.00    55,000.00 

Per  cent  to  Net  Sales 50.9  51.85 

Gross  Profit  from  Sales $217,000.00  $260,000.00  $  43,000.00 

Per  cent  to  Net  Sales 49.10  48.15 

SELLING  EXPENSES 

Salesmen's  Salaries $  23,000.00  $  20,000.00  $  *3,000.00 

Commissions  44,200.00  54,000.00    9, 800. 00 

Traveling  15,000.00  10,000.00    *5,000.00 

Freight-Out  18,000.00  20,000.00    2,000.00 

Shipping  and  Delivery  22,000.00  27,000.00     5,000.00 

Total  Selling  Expense  $122,200.00  $131,000.00  $  8,800.00 

Per  cent  to  Net  Sales 27.65  24.26 

Net  Trading  Profit  $  94,800.00  $129,000.00  $  34,200.00 

Per  cent  to  Net  Sales 21.45  23.89 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 

Executive  Salaries  $  25,000.00  $  30,000.00  $  5,000.00 

Office  Salaries 40,000.00  50,000.00    10,000.00 

Telephone  and  Telegraph  1,100.00  1,200.00      100. 00 

Stationery  and  Postage  2,500.00  2,800.00      300.00 

Miscellaneous  5,000.00  6,500.00     1,500.00 

Total  General  and  Administrative  Expenses  ....  $  73,600.00  $  90,500.00  $  16,900.00' 

Per  cent  to  Net  Sales 16.65  16.76 

Net  Profit  from  Operations  $  21,200.00  $  38,500.00  $  17,300.00 

Per  cent  to  Net  Sales 4.80  7.13 

OTHER  INCOME 

Interest  Received  $  2,000.00  $  3,000.00  $  1,000.00 

DiscouBt  Received  12,000.00  17,000.00     5,000.00 

Total  Other  Income  $  14,000.00  $  20,000.00  $  6,000.00 

$  35,200.00  $  58,500.00  $  23,300.00 

EXPENSES 

Interest  Paid     $     9,000.00  $  12,000.00  $     3,000.00 

Discount  Allowed   4,500.00  4,000.00             *500.00 

Total  Other  Expenses   S  13,500.00  $  16,000.00  $     2,500.00 

Net  Profit  for  Period   (Figure  2)    $  21,700.00  $  42,500,00  $  20,800.00 


Figure  5.    Comparative  Profit  and  Loss  Statement 


Assignment  29,  Page  12 


Ill  prewsenting  the  proper  arrangement  of  a  manufacturing  statement 
and  the  relationship  of  the  items  of  which  it  is  composed,  we  have  pre- 
pared the  following  schedule,  setting  forth  in  detail  the  various  items 
composing  the  total  cost  of  sales  shown  in  the  various  cases  to  which  ref- 
erence was  formerly  made  in  the  text. 

The  value  of  a  supporting  statement  of  this  nature  and  description  is 
inestimable,  in  that  all  the  details  are  confined  to  the  schedule,  the  total 
only  being  transferred  to  the  principal  statement.  The  details  of  this 
statement  may  be  included  in  the  cost  of  sales  section  of  the  comparative 
profit  and  loss  statement,  provided  they  are  not  too  numerous.  In  the  case 
presented  this  would  not  be  advisable. 


THE  WESTERN  MANUFACTURING  COMPANY 

COMPARATIVE  MANUFACTURING  AND  COST  OF  SALES  STATEMENT 

—YEARS  ENDING  DECEMBER  31,  1921,  AND  1922 

Increase  or 
1921        1922     *Decrease 
Inventory  of  raw  materials  at  beginning  of  period  .  $100,000.00  $200,000.00  $100,000.00 


Purchases 195 

Freight  Inbound  15 


Total   $310 

Deduct  Raw  Material  Inventory  at  End  of  Period  .  .  .  200 


Cost  of  Raw  Materials  Used 
Productive  Labor  


$110 
64 


Prime  Cost  of  Goods  Manufactured  .  .  .' 174 

MANUFACTURING  EXPENSES 

Superintendence  $  5 

Nonproductive  Labor  15 

Heat,  Light,  and  Power 9 

Taxes  (Real  and  Personal) 5 

Insurance  2 

Depreciation  11 

Repairs  and  Maintenance  4 

Factory  Supplies  2 

Miscellaneous  Factory  Expense  2 


Total  Manufacturing  Expenses  $  56 

Add:  Inventory  of  work  in  Process  at  Beginning 

of  Period 135 


$365 
Deduct:  Inventory  of  Work  in  Process  at  Close  of 

Period 150 


Cost  of  Goods  Manufactured $215 

Add:  Inventory  of  Finished  Goods  at  Beginning  of 

Period 60 

Total   $275 

Deduct:  Inventory  of  Finished  Goods  at  End  of 

Period 50 


Cost  of  Sales. 


$225 


000.00 
000.00 


345 
20 


000.00  $565 
000.00   450 


000.00  $115 
000.00    79 


000.00   194 


000.00  $  6 

000.00    17 

000.00 

500.00 

000.00 

500.00 

000.00 

000.00 

000.00 


000.00  $  66 
000.00   150 


000.00  $410 
000.00   100 


000.00  $310 
000.00    50 


000.00  $360 
000.00    80 


000.00  $280 


000.00 
000.00 


150,000.00 
5,000.00 


000.00  $255,000.00 
000.00   250,000.00 


000.00  $  5,000.00 
000.00    15,000.00 


000.00    20,000.00 

000.00  $  1,000.00 
500.00    2,500.00 


500.00 
000.00 
500.00 
250.00 
500.00 
000.00 
750.00 


1,500.00 
500.00 
500.00 
750.00 
500.00 
1,000.00 
1,750.00 


000.00  $  10,000.00 
000.00    15,000.00 


000.00  $  45,000.00 
000.00   *50,000.00 


000.00  $  95,000.00 
000.00   *10,000.00 


000.00  $  85,000.00 
000.00    30,000.00 


000.00  $  55,000.00 


Figure  6.     Comparative  Manufacturing  and  Cost  of  Sales  Statement 

Assignment  29,  Page  13 


A  majority  of  the  companies  operating  on  industrial  lines  are  organized 
for  profit.  Any  increase  or  decrease  affecting  net  profit  should  be  ex- 
plained.   In  Figure  5,  the  changes  may  be  explained  as  follows : 

Sales  and  Cost  of  Sales.     1,  Sales  increased  $100,000.00,  which  is  probably  the 
result  of  a  change  in  economic  conditions  or  sales  policies. 
2.  Cost  of  Sales  increased  $55,000.00. 

Figure  6  furnishes  the  amounts  comprising  this  increase. 

ANALYSIS  OF  INCREASE  OF  COST  OF  SALES 

Elements  of  Manufacturing  Cost: 

Increase  in  Raw  Materials  Used $  5,000.00 

Increase  in  Productive  Labor 15,000.00 

Increase  in  Manufacturing  Expense   10,000.00 

Total  Increase  in  Costs $30,000.00 

Change  in  Work  in  Process  Inventories: 

From  an  increase  in  Inventory  at  beginning,   of     $15,000.00 

To  a  decrease   in  Inventory  at  end,   of 50,000.00 

Makes  a  total  decrease  of  65,000.00 

Increase  in  Cost  of  Finished  Goods  Manufactured     $95,000.00 

Change  in  Finished  Goods  Inventories: 

From  a  decrease  in  Inventory  at  beginning,  of  $10,000.00 

To  an  increase  in  Inventory  at  end,   of 30,000.00 

Makes  a  total   increase,   of     40,000.00 

Increase  in  Cost  of  Goods  Sold $55,000.00 

Figure  5  shows  the  percentage  of  cost  of  sales  to  net  sales  as  50.9  for 
1921  and  51.85  for  1922.  This  shows  that  the  cost  has  actually  advanced 
.95,  or  less  than  1  per  cent. 

The  Selling  Expenses. — The  selling  expenses  show  the  following 
changes : 

1.  Salesmen's  salaries  have  decreased  $3,000.00.  This  may  be  due  to  the  liberal 
commission  policy  which  the  company  had  adopted  and,  because  of  this,  de- 
cided to  reduce  the  salaries.  It  may  be  due  to  a  desire  to  gradually  work 
toward  a  straight  commission  basis. 

2.  Commissions  have  increased  in  proportion  to  the  increase  in  sales. 

3.  Traveling  expenses  have  decreased  $5,000.00  altho  the  sales  increased 
$100,000.00.  This  indicates  a  favorable  condition,  as  the  company  is  able  to 
market  a  larger  amount  of  product  on  a  smaller  expenditure  of  traveling 
expenses.    This  may  also  denote  an  increase  in  orders  by  mail. 

4.  Freight-out  and  shipping  and  delivery  increased  $2,000.00  and  $5,000.00 
respectively,  which  is  favorable  with  an  increase  in  sales. 

The  general  and  administrative  expenses  have  increased  $16,900.00, 
composed  of  the  following  items : 

1.  The  executives'  salaries  increased  $5,000.00.  This  is  purely  a  point  of  the 
policy  of  the  board  of  directors. 

2.  The  office  salaries  increased  $10,000.00,  which  is  in  accordance  with  the  extra 
work  brought  about  thru  the  increase  in  sales. 

3.  The  increase  in  telephone  and  telegraph  and  miscellaneous  expenses  is 
nominal  and  is  of  little  importance  as  compared  with  the  other  items. 

Other  Income  and  Expenses. — The  increases  or  decreases  in  other  in- 
come and  expenses  are  of  less  importance  than  those  connected  with  the 

Assignment  29,  Page  14 


operations.  The  amount  of  discounts  allowed  is  dependent  upon  the  dis- 
counting policies  adopted  by  the  trade.  Likewise,  the  amount  of  discounts 
received  is  dependent  upon  the  policy  of  the  Western  Manufacturing  Com- 
pany. Discounts  allowed  or  received  cannot  be  based  on  sales  or  purchases. 
They  are  contingent  upon  the  financial  policies  of  the  seller  and  buyer. 

Value  of  the  Comparisons. — We  have  carefully  explained  the  increases 
or  decreases  appearing  in  the  comparative  profit  and  loss  statement,  and 
will  now  consider  the  value  of  the  comparisons. 

1.  The  sales  increased  22.2  per  cent. 

2.  The  cost  increased  from  50.90  per  cent  of  net  sales  to  51.85  per  cent.  We 
have  previously  explained  this  increase  as  due  to  the  increase  in  cost  of 
materials,  labor,  etc. 

3.  The  selling  expenses  decreased  from  27.65  per  cent  of  net  sales  to  24.26  per 
cent,  or  3.39  per  cent  of  the  net  sales.  This  denotes  a  possible  increase  of 
sales  thru  orders  by  mail  or  the  result  of  a  better  sales  force. 

4.  The  general  and  administrative  expenses  increased  .11  per  cent,  which  has 
no  real  importance. 

5.  The  net  profit  from  operations  increased  2.33  per  cent  of  net  sales,  proving 
that  a  larger  volume  of  sales  will  also  produce  a  corresponding  increase  on 
the  margin  of  profit. 

Regardless  of  the  use  of  the  statement,  the  facts  aforementioned  are 
of  vital  interest.  They  show  clearly  that  the  cost  of  goods  is  nearly  stand- 
ardized, that  the  selling  expenses  may  be  reduced  in  per  cent  to  total  by  a 
larger  volume  of  sales,  and  that  the  general  and  administrative  expenses 
are  subject  to  slight  fluctuation  and  may  have  reached  the  maximum 
amount. 

In  Figure  7,  we  show  a  form  of  annual  comparative  statement  illus- 
trating the  percentage  relation  of  each  class  of  expense  to  the  group  total. 
All  computations  in  this  statement  are  based  on  net  sales. 

This  statement  is  of  especial  value  where  an  analysis  of  each  group  is 
desired.  In  Figure  5  we  considered  each  group  as  a  total.  Where  the 
banker,  the  management,  or  the  stockholder  desires  to  analyze  the  per 
cent  of  each  to  the  net  sales,  this  statement  will  be  of  greater  value.  The 
percentages  are  shown  individually ;  hence,  the  information  is  now  avail- 
able for  their  use. 

The  detailed  percentage  statement  is  not  always  necessary,  but  where 
a  condition  arises  similar  to  that  outlined  above  it  should  be  substituted  in 
place  of  the  form  given  in  Figure  5.  The  reader  should  be  governed  by 
the  requirements  of  his  particular  case. 

Many  people  become  confused  when  they  are  reviewing  comparative 
statements.  This  is  due  to  the  vast  amount  of  detail  included  in  the  state- 
ment. This  confusion  may  be  avoided  by  the  use  of  a  summary,  which 
tends  to  bring  out  only  the  very  important  factors.  This  form  of  state- 
ment is  easily  constructed,  easily  read,  and  might  be  stated  as  self-explana- 
tory. It  is  of  especial  value  to  the  busy  executive,  banker,  and  others  who 
desire  onlv  concrete  information. 


Assigniment  15,  Page  15 


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Assignment  29,  Page  16 


Collecting  the  items  appearing  in  Figure  5  we  have  the  following  sum- 
mary : 

SUMMARY  OF  INCREASES 

Increase  in  Net  Sales  $  98,000.00 

Increase  in  Cost  of  Sales  55,000.00 

Increase  in  Gross  Profit  from  operations  $  43,000.00 

Increase  in  Selling  Expenses  8,800.00 

Increase  in  Net  Trading  Profit  $  34,200.00 

Increase  in  General  and  Administrative  Expenses  .  .  .   16,900.00 

Increase  in  Net  Profit  from  Operations  $  17,300.00 

Increase  in  Other  Income — Net  3,500.00 

Increase  in  Net  Profit  for  Period  S  20,800.00 

Two  very  important  facts  are  presented  in  this  summary: 

1.  Selling  expense  is  to  an  extent  predetermined  in  character,  that  is,  it  does 
not  fluctuate  in  proportion  to  the  sales. 

2.  A  consistent  policy  of  discounting  purchases  is  now  in  effect. 

It  is  interesting  to  learn  from  the  foregoing  summary  of  increases  that 
$98,000.00  increase  in  sales  produced  an  increase  in  net  profits  from  opera- 
tions amounting  to  $17,300.00.  This  was  due  to  an  increase  in  cost  of  sales 
amounting  to  $55,000.00,  selling  expenses,  $8,800.00,  and  general  and  ad- 
ministrative expenses,  $16,900.00.  Why  is  this  of  special  importance?  It 
brings  out  clearly  the  fact  that  a  company  must  maintain  a  certain 
operating  expense,  and  that  it  is  possible  to  increase  the  volume  of  sales 
without  adding  a  proportionate  amount  to  the  selling  and  administrative 
expenses. 

In  many  instances  the  question  arises  concerning  the  value  of  com- 
parison. Comparison  not  only  discloses  the  amount  of  the  increases  and 
decreases,  but  also  portrays  the  relative  importance  of  the  items:  viz.,  it 
shows  the  increase  of  an  expense  to  be  in  proportion  to  an  increase  in  pro- 
duction or  sales,  or  it  shows  the  increase  in  expense  to  be  entirely  out  of 
proportion  to  the  increase  in  sales. 

Comparison  between  years  or  periods  has  certain  values  in  price  fixing 
which  are  of  especial  importance.  The  management  of  the  Western  Man- 
ufacturing Company  is  contemplating  a  reduction  of  costs  prior  to  a  pos- 
sible adjustment  of  selling  prices.  The  cost  of  sales  statement,  Figure  6, 
discloses  the  items  of  cost  which  might  be  reduced  in  part,  also  those  which 
would  remain  fixed  regardless  of  the  fluctuation  in  sales.  This  refers  to 
depreciation,  taxes,  insurance,  and  other  similar  items.  It  would  also  dis- 
close the  tendency  to  increase  certain  elements  of  cost  entirely  out  of  pro- 
portion to  the  fluctuation  of  sales.  Thus,  if  the  management  ascertained 
that  the  costs  were  entirely  too  high  an  attempt  should  be  made  to  reduce 
them  to  a  normal  basis.  The  use  of  percentages  to  the  total  serves  as  a 
valuable  aid  in  standardizing  the  costs  of  the  various  materials  and  ex- 
penses used  in  production. 

The  principle  underlying  the  analysis  of  the  elements  of  cost  also 
applies  to  the  selling  and  general  administrative  expenses.  Where  an 
expense  has  increased  without  a  valid  reason,  the  increase  should  be  in- 
vestigated to  deteniiine  if  it  is  necessary,  or  if  there  is  a  way  to  reduce  it 

Assignment  29,  Page   17 


to  a  normal  basis.  The  comparative  statement  would  aid  materially  in 
the  control  of  expenses  due  to  the  changes  disclosed  in  the  "Increase  or 
Decrease"  columns. 

Cumulative  Comparative  Profit  and  Loss  Statement. — What  has  been 
said  regarding  the  value  of  annual  comparisons  applies  to  the  cumulative 
comparison.  By  this  is  meant  the  comparison  of  operations  for  two  or 
more  months,  or  the  operations  from  the  beginning  of  the  period  to  the 
date  of  comparison. 

The  Western  Manufacturing  Company  realized  a  profit  of  $42,500.00 
for  the  year.  This  does  not  mean  that  one-twelfth  was  earned  each  month. 
This  is  the  ordinary  conception  of  an  annual  profit.  This  is,  of  course,  mis- 
leading where  a  company  has  a  seasonal  business,  or  when,  during  certain 
months  of  the  year,  the  earnings  are  below  the  average. 

In  many  instances  the  subnormal  months  or  conditions  may  be  dis- 
covered by  the  use  of  cumulative  comparative  statements.  They  also  show 
the  amount  of  merchandise  required  to  produce  a  given  volume  of  sales. 
Likewise,  they  may  denote  a  period  of  the  year  when  a  normal  stock  of 
merchandise  would  be  unnecessary  on  account  of  the  subnormal  turnover. 

The  form  of  this  statement  is  shown  under  Figure  8. 

WESTERN  MANUFACTURING  COMPANY 

CUMULATIVE  COMPARATIVE  PROFIT  AND  LOSS  STATEMENT 

FOR  TEN  MONTHS  ENDED  OCTOBER  31,  1921,  AND  1922 

Ten  Months       %  to     Ten  Months       %  to       Increase 

ended  Net  ended  Net  or 

10/31/1921       Sales     10/31/1922       Sales     *Decrease 

SALES   $392,000.00  $460,000.00  $68,000.00 

Less  Returns  and  Allowances   7,500.00  8,100.00  600.00 

Net  Sales   $384,500.00     100         $451,900.00     100         $67,400.00 

COST  OF  SALES   202,000.00       52.5       233,000.00       51.6       31,000.00 

Gross  Profit  from  Operations     ....  $182,500.00  47.5  $218,900.00  48.4  $36,400.00 
SELLING  EXPENSES 

Salesmen's  Salaries   $  19,000.00  4.9  $  17,000.00  3.8  $*2,000.00 

Commissions   38,450.00  10.  45,190.00  10.  6,740.00 

Traveling   12,500.00  3.3  8,200.00  1.8  *4,300.00 

Freight  Out   15,000.00  3.9  16,000.00  3.5  1,000.00 

Shipping  and  Delivery   18,300.00  4.8  22,500.00         5.  4,200.00 

Total  Selling  Expenses $103,250.00       26.9     $108,890.00       24.1     $  5,640.00 

Net  Trading  Profit $  79,250.00  20.6  $110,010.00  24.3  $30,760.00 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 

Executive  Salaries $  20,500.00  5.3  $  25,000.00  5.5  $  4,500.00 

Office  Salaries   33,000.00  8.6  41,600.00  9.2  8,600.00 

Telephone  and  Telegraph  1,000.00  .3  1,000.00  .2 

Stationery  and  Postage     2,000.00  .5  2,300.00  .5  300.00 

Miscellaneous   4,200.00  1.1  5,500.00  1.2  1,300.00 

Total  General  and  Administrative 

Expenses $  60,700.00       15.7     $  75,400.00       16.7     $14,700.00 

Net  Profit  or  Loss  from  Operations.    .   $  18,550.00        4.9     $  34,610.00        7.6     $16,060.00 
♦Decrease  —  =  = 

Figure  8.     Cumulative  Comparative  Profit  and  Loss  Statement 


Assignment  29,  Page  18 


I 


The  value  of  this  statement  is  based  solely  on  its  use  in  showing  the 
trend  of  the  business  before  the  close  of  the  year.  It  usually  is  prepared 
for  the  use  of  the  management  and  is  generally  considered  of  most  impor- 
tance when  used  in  a  like  capacity.  The  comparison  is  similar  to  that  of 
the  annual  statements,  the  only  difference  being  in  the  period  of  time 
over  which  it  extends.  The  preparation  and  use  of  this  statement  is  of 
course  dependent  upon  the  general  accounting  policies  of  the  company; 
viz.,  the  inventory  records,  closing  the  books,  etc. 

The  analysis  of  a  statement  does  not  consist  in  merely  locating  the 
small  differences.  The  comparison  sets  forth  clearly  all  differences  con- 
tributing to  the  ultimate  increase  or  decrease,  and  all  stress  should  be 
centered  on  those  items  which  represent  the  greater  part  of  the  total. 

Reading  a  financial  statement,  considering  the  comparisons,  under- 
standing their  relationship  to  the  other  accounts,  and  planning  for  the 
future  on  experience  of  the  past  are  all  highly  valued  factors  in  the  busi- 
ness training  which  the  successful  financial  executive  should  obtain. 

A  few  facts  may  be  readily  obtained  from  Figure  8,  covering  the  ten- 
month  period  ended  October  31,  1921.  The  profit  amounted  to  $18,550.00 
as  compared  with  $34,610.00  for  the  same  period  of  1922.  The  net  profit 
of  $18,550.00  for  the  ten  months  ended  October  31,  1921,  was  equivalent 
to  4.7  per  cent  of  the  net  sales,  while  the  profit  for  the  same  period  of 
1922,  amounting  to  $34,610.00,  was  equivalent  to  7.6  per  cent  of  the  net 
sales.  The  real  value  obtained  from  the  cumulative  amounts,  taken  from 
the  totals  thus  ascertained,  serves  as  a  basis  for  estimating  the  annual 
result,  and  may  be  used  with  a  certain  degree  of  accuracy. 

The  items  comprising  the  greater  part  of  the  increase  in  cost  and  ex- 
penses, as  shown  in  Figure  8,  may  be  summarized  as  follows: 

Cost  of  Sales $31,000.00 

Commissions  6,740.00 

Executive  Salaries 4,500.00 

Office  Salaries  8,600.00 

Due  consideration  must  be  given  to  each,  in  the  order  in  which  they 
appear  above.  The  percentage  costs  of  sales  for  the  two  ten-month  periods 
are  given  below: 

Ten  Months  Ending  October  31,  1921 52.5% 

Ten  Months  Ending  October  31,  1922 51.6 

Decrease 9% 

The  commissions  increased  in  the  same  proportion  as  the  sales;  hence 
this  does  not  affect  the  ultimate  result. 

The  executive  salaries  for  the  two  ten-month  periods  are: 

Ten  Months  Ended  October  31,  1921 5.3% 

Ten  Months  Ended  October  31,  1922 5.5 

Increase 2% 

The  office  salaries  for  the  two  ten-month  periods  are: 

Ten  Months  Ended  October  31,  1921 8.6% 

Ten  Months  Ended  October  31,  1922 9.2 

Increase 6% 

Assignment  29,  Page  19 


If  due  care  has  been  given  to  the  points  outlined,  it  is  easily  seen  that 
a  means  of  bettering-  the  condition,  as  brought  before  the  management 
of  the  Western  Manufacturing  Companj^,  would  be  to  reduce  the  salaries 
to  conform  to  a  standard  based  on  previous  amounts.  This  may  be  impos- 
sible, much  less  practical,  to  maintain  the  height  of  efficiency;  hence,  this 
problem  is  one  to  be  solved  by  the  management.  In  any  event,  the  facts 
have  been  placed  before  the  management  by  the  use  of  the  comparative 
profit  and  loss  statement. 

Departmental  Comparative  Profit  and  Loss  Statements. — Many  of  the 
large  industries  are  divided  into  distinct  units  known  as  "departments." 
In  some  instances  these  departments  represent  a  medium  for  producing  a 
completed  article,  while  in  others  only  a  part  of  the  work  is  performed. 
In  either  event  the  business  may  be  departmentalized  to  such  an  extent 
that  the  results  of  each  department  may  be  obtained.  It  has  been  truth- 
fully said,  "A  chain  is  no  stronger  than  its  weakest  link."  If  a  company 
is  operating  one  or  more  departments  at  a  loss,  the  best  plan  would  be 
either  to  remedy  the  condition  or  discontinue  that  part  of  the  product. 
This  of  course  is  a  problem  for  the  management.  A  comparison  may  be 
made  of  the  same  for  different  periods  as  outlined  in  Figure  9. 

WESTERN  MANUFACTURING  COMPANY 
PARATIVE  DEPARTMENTAL  PROFIT  AND  LOSS  STAT 
YEARS  ENDING  DECEMBER  31,  1921,  AND  1922 

1921  1922  Increa 

Department  Department  or 

B  B  *Decrea 

$320,000.00  $360,000.00  $40,000 

rns  and  Allowances  6,000.00  7,000.00  1,000 

$314,000.00  $353,000.00  $39,000 

ES  170,000.00   180,000.00   10,000 

fit  from  Operations  $144,000.00  $173,000.00  $29,000 

EKSE 

3  Salaries  $  15,000.00  $  13,000.00  $*2,000 

IS  29,400.00  35,300.00  5,900 

9,000.00  6,000.00  *3,000 

Jt  13,500.00  14,000.00  500 

ind  Delivery  12,500.00  18,000.00  5,500 

ling  Expense $  79,400.00  $  86,300.00  $  6,900 

ig  Profit $  64,600.00  $  86,700.00  $22,700 

ADMINISTRATIVE  EXPENSES 

Salaries $  18,000.00  $  22,000.00  $  4,000 

laries  25,000.00  35,000.00  10,000 

and  Telegraph 700.00  800  00  100 

/  and  Supplies  1,600.00  1,800.00  200 

eous  3,200.00  4,300.00  1,100 

eral   and  Administrative 
$  48,500.00     $  63,900,00     $15,400 

t  from  Operations $  16,100.00     $  22,800.00     $  6,700 

Fi.Qure  9.    Comparative  Departmental  Profit  and  Loss  Statement 


WESTERN  MANUFACTURE 

COMPARATIVE  DEPARTMENTAL  PROFIT 

YEARS  ENDING  DECEMBER  31 

1921 

Department 

B 

SALES $320,000.00 

Less  Returns  and  Allowances   6.000.00 

G  COMPANY 
AND  LOSS  STATEMI 
1921,  AND  1922 

1922            Increase 
Department             or 
B               *Decrease 
$360,000.00     $40,000.00 
7,000.00         1,000.00 

i:nt 

Per  Cent 

Increase 

or 

♦Decrease 

12.5 

16.7 

12.4 
5.9 

20.1 

*13.3 
20.1 

*33.3 
3.7 
44. 

8.7 

34.2 

22.2 

40. 

14.3 

12.5 

34.4 

31.7 
41.6 

Net  Sales   

.    .   $314,000.00 

$353,000.00 
180,000.00 

$39,000.00 
10,000.00 

COST  OF  SALES   

Gross  Profit  from  Operations     .    . 
SELLING  EXPENSE 

Salesmen's  Salaries   

.    .     170,000.00 
.    .   $144,000.00 
.    .   $  15,000.00 

$173,000.00 

$  13,000.00 

35,300.00 

6,000.00 

14,000.00 

18,000.00 

$29,000.00 

$*2,000.00 

5,900.00 

♦3,000.00 

500.00 

5,500.00 

Commissions   

.    .       29,400.00 

Traveling   

9,000.00 

Freight-Out   

Shipping  and  Delivery   

Total   Selling  Expense   

.    .    .   13,500.00 
.    .       12,500.00 

.    .   $  79,400.00 

$  86,300.00 

$  6,900.00 

Net  Trading  Profit 

.    .   $  64,600.00 

$  86,700.00 

$  22,000.00 

35,000.00 

800  00 

1,800.00 

4,300.00 

$22,700.00 

$  4,000.00 

10,000.00 

100.00 

200.00 

1,100.00 

GENERAL  AND  ADMINISTRATIVE  EXPENSES 
Executive  Salaries 

.    .   $  18,000.00 

Office  Salaries    

25  000.00 

Telephone  and  Telegraph   

Stationery  and  Supplies   

.    .             700.00 
1.600.00 

Miscellaneous   

.    .         3,200.00 

Total  General   and  Administrative 
Expense   

.    .   $  48,500.00 

$  63,900,00 

$15,400.00 

Net  Profit  from  Operations.    .    .    . 

.    .   $  16,100.00 

$  22,800.00 

$  6,700.00 

♦Decrease 

Assignment  29,  Page  20 


The  comparison,  as  shown  in  Figure  9,  furnishes  information  relative  to 
the  earning  capacity  of  Department  B.  It  shows  the  increase  of  Depart- 
ment B  during  1922  over  Department  B  during  1921.  The  increase  of 
Department  B  during  1922  over  Department  B  during  1921  is  a  valuable 
feature,  serving  the  same  puipose  as  the  comparison  of  one  year  with 
another  in  the  annual  profit  and  loss  statement.  The  value  of  this  form 
of  comparative  statement  is  dependent  upon  the  desire  of  the  manage- 
ment, and  the  general  plan  and  layout  of  the  business. 

Comparative  Sales  Reports. — Comparative  sales  reports  are  of  special 
value  when  used  in  conjunction  with  the  other  statements.  They  show 
the  trend  of  sales  over  a -period  of  time,  and  may  be  used  to  advantage  in 
putting  on  a  sales  campaign,  fixing  commissions  on  sales,  and  other  impor- 
tant points  involved  in  the  management  of  a  company.  One  advantage  of 
the  sales  report  is  the  usual  plan  of  showing  the  sales  over  a  greater  num- 
ber of  years,  months,  or  other  periods  than  would  ordinarily  be  covered 
by  a  comparative  profit  and  loss  statement. 

Cost  of  sales  and  gross  profit  may  be  shown  in  connection  with  the 
sales  report.  The  sales  report,  further  illustrated  by  the  use  of  the  graphic 
chart,  forms  a  very  interesting  report  for  the  management.  This  may  be 
prepared  monthly,  semi-annually,  or  annually. 

The  following  amounts  taken  from  the  accounts  of  the  Western  Manu- 
facturing Company  will  serve  as  a  basis  for  illustrating  the  use  of  these 
statements. 

Net      Cost  of      Gross 
Sales       Sales       Profit 

1918  $325,000.00  $195,000.00  $130,000.00 

1919  275,000.00  132,000.00  143,000.00 

1920  410,000.00  196,800.00  213,200.00 

1921  442,000.00  225,000.00  217,000.00 

1922  540,000.00  280,000.00  260,000.00 

The  above  amounts  would  be  stated  on  a  graphic  chart  as  shown  in 
Figure  10. 

The  graphic  chart  presents  an  actual  condition  which  existed  after  the 
close  of  the  War.  During  the  year  of  1919  many  companies  engaged  in 
the  manufacture  of  war  products  suffered  a  decline  in  sales  due  to  can- 
cellation of  contracts  by  the  U.S.  government.  Other  lines  of  business 
declined  on  account  of  the  demand  being  far  below  normal.  This  condi- 
tion continued  thruout  1919  and  1921.  The  year  of  1921  brought  a  nomi- 
nal increase,  which  continued  during  the  year  of  1922.  In  considering  the 
facts  presented  in  this  statement  the  reader  should  review  the  economic 
conditions  prevailing  during  the  years  of  1918  to  1922  inclusive. 

The  graphic  chart  presented  in  this  assignment  should  be  compared 
with  the  amounts  submitted  prior  to  the  chart,  and  these  amounts  should 
be  traced  carefully  thruout  the  entire  period.  The  numbers  ranging  from 
1  to  580  shown  at  the  left  of  the  chart  denote  amounts  in  thousands.  The 
heavy  vertical  line  at  the  right  of  the  year  is  used  as  the  basis  for  charting 
the  facts  for  the  year. 

Assignment  29,  Page  21 


WESTERN  MANUFACTURING  COMPANY 


SALES         COST  OF  SALES 
AND  GROSS  PROFIT 


READ  IN  TERMS 
OF    THOUSANDS 

1918 

1919 

1920 

1321 

1922 

1 

i 

- 

580 

570 

560 

550 

540 

530 

/ 

5?0 

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- 

510 
500 

- 

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490 

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480 

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380 

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SALES                       1 

COST  OF  SALES 1 

GROSS  PROFIT [ 

SCALE  $10,000.00  FOR  EACH  SECTION. 

Figure  10.     Chart  showing  comparative  sales  report  for  five  years 


Assignment  29,  Page  22 


Using  the  Information. — The  real  value  of  comparative  statements  is 
reflected  in  their  uses.  The  trend  of  the  business  is  very  important.  Esti- 
mating for  the  future  is  also  very  important. 

We  have  learned  how  the  statements  are  prepared,  also  how  the  per- 
centages are  computed.  We  have  found  the  percentages  for  the  years  of 
1921  and  1922  to  be  as  follows: 

1922  «5  11921 

Cost  of  Sales 51.85%  50.90% 

Cost  of  Selling 24.26   27.65 

General  and  Administrative  Cost  16.76   16.65 

Net  Profit  from  Operations 7.13    4.80 

100%   100% 

We  have  determined  the  percentages  of  the  cost,  selling  expenses,  and 
general  and  administrative  expenses.  This  information  is  placed  before 
the  management,  when  they  plan  ahead  for  the  year  of  1923. 

They  wish  to  determine  the  approximate  cost,  selling,  general  and 
administrative  expenses,  and  profit  based  on  annual  sales  of  $700,000.00. 
This  can  be  accomplished  by  the  following  method,  using  the  percentages 
of  1922  as  the  basis: 

Estimated  Sales  for  1923  $700,000.00 

1923  1922      1923 

Cost  of  Sales 51.85%  $362,950.00 

Cost  of  Selling  24.26    169,820.00 

General  and  Administrative  Cost 16.76    117,320.00 

Net  Profit  from  Operations  7.13    49,910.00 

$700,000.00 

This  is  purely  an  estimate,  but  it  illustrates  the  value  of  this  informa- 
tion as  an  aid  in  determining  the  future  policies  and  activities  of  the 
company. 

MAIN  POINTS  OF  THIS  ASSIGNMENT 

The  more  important  points  outlined  in  this  assignment  are  now  sum- 
marized as  an  aid  in  a  general  review. 

First :  Comparative  statements  of  the  more  important  type  are  divided 
into  four  groups. 

Comparative  Balance  Sheets. 
Comparative  Profit  and  Loss  Statements. 
Comparative  Manufacturing  Statements. 
Comparative  Sales  Reports. 

Second:  Comparative  statements  are  prepared  primarily  for  the  use 
of  the  management  as  an  aid  in  directing  future  financial,  sales, 
costs,  and  general  policies  of  a  corporation.  This  with  other  added 
features  is  outlined  in  the  following  summary. 

(Disposition  of  profits. 
Directing  Future  Policies. 
Expansion  and  Growth, 
■ra-  _„-•  1        (  Bond  Issues  and  Loans, 
jjmanciai       |  Collateral  Note  Financing. 

Special  Stockholders. 

Assignment  29,  Page  23 


Third:  Disposition  of  profits  by  use  of  a  comparative  balance  sheet 
may  be  allocated  thru  the  medium  of  an  analysis  of  surplus,  and 
application  of  funds  statement. 

Fourth:  The  real  worth  of  a  comparative  balance  sheet  is  dependent 
upon  the  classification  of  the  different  accounts  of  which  it  is  com- 
posed. 

Fifth :  In  reading  financial  statements  the  entire  group  should  be  read 
simultaneously  in  order  that  all  facts  may  be  determined.  This 
usually  necessitates  the  preparation  of  a  balance  sheet,  analysis  of 
surplus,  and  a  profit  and  loss  statement. 

Sixth:    Profit  and  loss  statements  may  be  classified  as  follows: 

Annual  Cumulative 

Monthly        Departmental 

Seventh :  Certain  classes  of  expenses  are  of  a  fixed  nature  and  do  not 
fluctuate  proportionately  to  the  sales. 

Eighth:  Reading  a  financial  statement,  considering  the  comparisons, 
understanding  their  relationship  to  the  other  accounts,  planning  for 
the  future  on  experience  of  the  past,  are  all  highly  valued  points  in 
business  training  which  the  successful  financial  executive  should 
possess. 

Ninth:  The  real  worth  of  any  comparative  statement  is  dependent 
upon  the  preparation  and  the  knowledge  of  the  individual. 

Tenth:  Percentages  may  be  substituted  in  place  of  amounts  and,  in 
many  instances,  may  be  more  flexible  in  their  application.  The  use 
is  dependent  upon  this  condition  and  the  selection  should  be  made 
with  this  point  in  mind. 

Eleventh :  Sales  reports  are  equally  important  to  the  management  and, 
when  used  in  conjunction  with  a  graphic  chart,  are  a  clearer  illus- 
tration of  the  trend  of  the  business. 

Twelfth:  Future  profits  may  be  estimated  on  a  predetermined  sales 
program  by  using  the  percentages  of  the  various  elements  as  shown 
by  a  comparative  statement  for  the  previous  year,  or  on  an  average 
over  a  group  of  years. 


Assignment  29,  Page  24 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  29 

Prepare  and  send  in  solutions  for  all  of  the  following  problems: 

(1)  The  trial  balances  of  the  Clark  Mercantile  Company  at   December 
31,  1921,  and  1922,  are  submitted  herewith. 

1921  1922 

Cash S   5,000.00  $   7,500.00 

Accounts  Receivable  120,000.00  180,000.00 

Notes  Receivable  20,000.00  75,000.00 

Sundry  Accounts  Receivable  ....     5,000.00  2,000.00 

Investments  10,000.00  13,000.00 

Land  and  Buildings  180,000.00  113,000.00 

Furniture  and  Fixtures  7,000.00  7,000.00 

Notes  Payable  $  115,000.00            $   15,000.00 

Accounts  Payable  72,600.00               55,000.00 

Accrued  Taxes  5,000.00               5,500.00 

Accrued  Salaries  2,500.00               3,000.00 

Reserve  for  Depreciation  15,300.00               18,000.00 

Capital  Stock  150,000.00              150,000.00 

Surplus  11,900.00              139,100.00 

Sales  961,000.00            1,166,600.00 

Returns  and  Allowances  on  Sales  .  .     9,500.00  10,500.00 

Purchases  689,300.00  808,000.00 

Previous  Inventory  120,000.00  150,000.00 

Freight  on  Purchases  10,000.00  22,000.00 

Salesmen's  Salaries  and  Commissions    65,500.00  65,000.00 

Traveling  Expenses  15,000.00  19,100.00 

Miscellaneous  Expenses  3,000.00  3,500.00 

Officers'  Salaries 15,000.00  15,000.00 

Office  Salaries  20,000.00  22,000.00 

Telephone  and  Telegraph  1,800.00  1,900.00 

Office  Supplies  and  Stationery  .  .     3,500.00  3,700.00 

Taxes  7,500.00  7,800.00 

Depreciation  4,200.00  2,700.00 

Discounts  12,000.00  11,100.00 

Insurance  6,000.00  6,300.00 

Interest  1,000.00  1,900.00 

Miscellaneous  Administrative  Expense    3,000.00  4,200.00 

$1,333,300.00  $1,333,300.00  $1,552,200.00  $1,552,200.00 


In  addition  the  following  items  are  submitted: 


Merchandise  Inventory 
Office  Supplies  and  Stationery 
Unexpired  Insurance 


December  31, 1921     December  31, 1922 


$150,000.00 

500.00 

2,000.00 


$165,000.00 
700.00 
2,200.00 


From  the  foregoing  facts  prepare : 

(a)  Comparative  balance  sheet. 

(b)  Comparative  profit  and  loss  statement  with  detailed  percentages. 


Assignment  29,  Page  25 


(2)  The  Milton  Automobile  Company  earned  a  substantial  profit  during 
the  calendar  year  of  1922.  The  management  presents  the  following  bal- 
ance sheet  and  other  data  concerning  the  operations  for  the  purpose  of 
ascertaining  the  disposition  of  the  earnings. 

MILTON  AUTOMOBILE  COMPANY 
COMPARATIVE  BALANCE  SHEET  AT  DECEMBER  31,  1921,  AND  1922 

ASSETS                                                                               1921  1922 

Cash $  15,000.00  $  12,000.00 

Deposits  with  Manufacturers  50,000.00  60,000.00 

Accounts  Receivable  155,000.00  170,000.00 

Notes  Receivable  300,000.00  315,000.00 

Inventories 

New  Cars 60,000.00  55,000.00 

Used  Cars  50,000.00  60,000.00 

Repair  Parts 25,000.00  20,000.00 

Oil,  Grease  and  Supplies 5,000.00  3,000.00 

Land 20,000.00  20,000.00 

Building 80,000.00  85,000.00 

Salesroom  and  Garage  Equipment 20,000.00  30,000.00 

Office  Furniture  and  Fixtures  5,000.00  5,000.00 

Prepaid  Insurance  1,000.00  1,200.00 

$786,000.00  $836,200.00 

LIABILITIES 

Notes  Payable  $  30,000.00  $  20,000.00 

Accounts  Payable  10,000.00  12,000.00 

Accrued  Wages  and  Taxes  6,000.00  6,200.00 

Reserve  for  Depreciation  18,000.00  22,100.00 

Capital  Stock  500,000.00  500,000.00 

Surplus  222,000.00  275,900.00 

$786,000.00  $836,200.00 


ANALYSIS  OF  SURPLUS  ACCOUNT,  DECEMBER  31,  1922 

Balance  at  Beginning  $222,000.00 

Profit  for  Period  73,900.00 

$295,900.00 
Cash  Dividends  Paid 20,000.00 


ilance  at  Close  $275,900.00 


From  the  foregoing  you  are  requested  to  prepare: 

(a)  A  properly  classified  balance  sheet. 

(b)  An  application  of  funds  statement. 


Assi^ment  29,  Page  26 


(3)  The  Tilman  Manufacturing  Company  has  operated  a  new  depart- 
ment for  the  past  two  years  and  submits  the  following  data  relative  to  the 
results  of  this  division,  known  as  Department  B. 

TILMAN  MANUFACTURING  COMPANY 

DETAILS  IN  FACTORY  LEDGER,  DEPARTMENT  B,  FOR  YEARS  ENDING 

DECEMBER  31,  1921,  AND  1922 

1921  1922 

Material  Purchased— Lumber  $125,000.00  $150,000.00 

Material  Purchased— Veneer  25,000.00  30,000.00 

Material  Purchased— Hardware  10,000.00  12,000.00 

Material  Purchased— Paint  and  Varnish  .  7,500.00  10,000.00 

Material  Purchased— Sundries  5,000.00  7,000.00 

Labor— Productive  50,000.00  65,000.00 

Labor— Nonproductive  10,000.00  15,000.00 

Factory  Supplies 5,000.00  7,000.00 

Taxes— Real  and  Personal  Property  .  .  .  700.00  750.00 

Insurance  500.00  600.00 

Depreciation 1,500.00  1,600.00 

Repairs  800.00  1,100.00 

Miscellaneous  500.00  1,000.00 

The  following  information  on  sales  and  inventories  is  also  submitted: 

1921  1922 

Net  Sales  $300,000.00  $400,000.00 

Raw  Material  Inventory  at  beginning  of  50,000.00  60,000.00 

Raw  Material  Inventory  at  end  of  60,000.00  70,000.00 

Work  in  Process  at  beginning  of  65,000.00  70,000.00 

Work  in  Process  at  end  of 70,000.00  50,000.00 

Finished  Goods  at  beginning  of 46,000.00  55,000.00 

Finished  Goods  at  end  of  55,000.00  95,000.00 

Taking  into  consideration  the  foregoing  facts  you  are  requested  to 
prepare : 

(a)  Comparative  manufacturing  and  cost  of  sales  statement. 

(b)  In  addition  to  the  information  outlined  you  are  told  the  selling 
expenses  were  5  per  cent  and  6  per  cent  and  the  administrative 
expenses  were  8  per  cent  and  9  per  cent  for  the  respective  years. 
Calculate  the  net  operating  profit  for  the  years  of  1921  and  1922, 
also  approximate  the  profit  for  1923  based  on  sales  of  $900,000.00 
and  percentages  computed  for  1922. 


I 


Assignment  29,  Page  27 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  «w/ 
PROCEDURE 


Elements  of  Accounting  Practice 


Assignment  30 

ANALYSIS  OF  FINANCIAL  STATEMENTS 
GENERAL  REVIEW 


ONE  of  the  most  pitiful  and  biggest  problems  of 
business  is  the  man  who  stands  still;  he  is 
almost  always  the  man  not  willing  to  make  the  per- 
sonal sacrifice  which  study  requires  but  which  always 
pays  dividends  in  the  long  run. 

C.  M.  LEMPERLY 

Advertising  Manager,  The  Sherwin-Williams  Co. 
Cleveland.  Ohio 


LaSalle  Extension  University 

Chicago 


NHA-30 


ASSIGNMENTS  IN 

ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  following  are  the  subjects  covered  in  the  first  section  of  the  course. 
In  bold-faced  type  are  the  lessons  you  now  have  on  hand.  Printed  in  lighter 
tj^pe  are  those  yet  to  come.  They  will  be  mailed  to  you  regularly  about 
once  a  month  in  lots  of  five.  Should  you  be  able  to  handle  them  more 
rapidly,  the  University  will  send  them  faster  on  request. 

1.  The  Balance  Sheet 

2.  The  Profit  and  Loss  Statement 

3.  The  General  Ledger 

4.  Closing  the  Ledger 

5.  The  Journal 

6.  Closing  the  Ledger  by  Journal  Entry 

7.  The  Cash  Journal 

8.  Merchandise  Records — The  Purchase  and  Sales  Journals 

9.  Subdivision  of  the  Ledger 

10.  Columnization 

11.  Promissory  Notes 

12.  Drafts,  Acceptances,  and  Bills  of  Lading 

13.  Auxiliary  Cash  Records 

14.  Other  Auxiliary  Books  and  Business  Papers 

15.  Finding,  Correcting,  and  Preventing  of  Errors 

16.  Accrued  and  Deferred  Items 

17.  Depreciation  and  Uncollectible  Accounts 

18.  Partnership  Accounting — Formation — Operation 

19.  Partnership  Accounting — Dissolution  Problems — Joint 

Ventures 

20.  Corporation  Accounting — Formation — Operation 

21.  Corporation  Accounting— Reorganizations — Mergers 

22.  The  Voucher  System 

23.  Factory  Accounting — Manufacturing  Statement 

24.  Factory  Accounting — Perpetual  Inventory — Cost  Sheets 

25.  Classification  of  Accounts 

26.  Single  Entry 

27.  Accounting  for  Nontrading  Concerns 

28.  Agency  Accounts — Branches — Consignments 

29.  Comparative  Statements 

30.  Analysis  of  Financial  Statements — General  Review 


Copyright  1922 

All  Rights  Reserved  in  All  Countries 

LaSalle  Extension  University 

Printed  in  the  U.S.A. 


ANALYSIS  OF 
FINANCIAL  STATEMENTS 

Accountants,  credit  men,  business  managers  and  others,  whose  duties 
or  intei'ests  require  them  to  examine  financial  statements,  have  developed 
an  almost  uncanny  shrewdness  in  drawing  conclusions  from  the  figures 
presented. 

So  highly  developed  is  this  ability  in  some  men  that  they  are  credited 
with  possessing  a  "gift"  for  analysis  of  business  statements  and  statistics 
— an  acute  accounting  or  business  sense  which  is  denied  to  most  people. 

This,  of  course,  is  not  true.  Anyone  thru  continual  contact  with  fig- 
ures, statements,  and  statistics,  who  will  "go  beneath  the  surface,"  or 
who  will  make  a  systematic  study  of  business  values  and  the  ratio  of  these 
values  to  each  other,  can  develop  just  such  an  ability. 

Purpose  of  Analysis.  The  rapid  development  and  expansion  of  our 
great  commercial  enterprises  has  necessitated  vast  amounts  of  borrowed 
capital.  Banks  will  not  lend  money,  investors  will  not  buy  stocks  and 
bonds,  in  fact  capital  will  not  be  advanced,  unless  some  knowledge  of  the 
financial  strength  of  an  enterprise  is  known  or  reasonably  assured. 

It  is  desirable  and  necessary,  therefore,  that  borrowers  furnish  banks 
well  prepared  statements  which  give  such  information  as: 

1.  Ability  to  meet  obligations 

2.  Security  or  value  back  of  owner's  Interest 

3.  Profit  possibilities 

Determining  the  financial  strength  of  a  business  undertaking  is  some- 
what analogous  to  the  work  of  the  civil  engineer,  who,  for  example,  is  ex- 
pected to  calculate  the  strength  of  materials  used  in  the  construction  of  a 
bridge  suitable  for  the  carrying  of  a  certain  load.  The  accountant  in  a 
similar  manner  should  weigh  the  financial  factors  that  establish  the 
strength  of  the  enterprise  under  examination. 

Conditions  Fundamental  to  a  Correct  Interpretation.  It  is,  of  course, 
obvious  that  statements  should  be  properly  constructed,  otherwise  any  at- 
tempt at  analysis  will  fail,  conclusions  will  be  erroneous,  and  action  based 
on  such  conclusions  is  apt  to  be  misleading. 

Among  professional  accountants  the  proper  form  for  balance  sheets 
and  profit  and  loss  statements  has  become  pretty  well  standardized.  In 
many  cases  the  form  is  prescribed  by  regulatory  bodies,  such  as  The  Inter- 
state Commerce  Commission,  Public  Service  Commissions,  State  Insurance 
Departments,  etc.  Much  has  also  been  done  by  various  voluntary  asso- 
ciations of  concerns  operating  in  the  same  commercial  field  toward  stand- 
ardization of  financial  and  operating  statements. 


NHA-30 


It  is  equally  important  that  the  classification  of  items  appearing  in  the 
statements  be  consistent.  Conclusions  cannot  be  safely  drawn  as  to  the 
trend  of  profits  or  expenses  from  one  period  to  another  unless  the  figures 
are  taken  from  a  classification  of  accounts  that  is  the  same  year  by  year. 
Likewise  the  items  should  always  appear  under  the  same  classification  in 
the  statements. 

With  these  fundamentals  always  observed,  the  correct  and  complete 
interpretation  of  financial  statements  depends  largely  upon  the  knowledge 
of  the  individual,  his  technical  training  and  experience  in  accounting  and 
business,  and  his  ability  to  recognize  the  important  factors  that  are  essen- 
tial to  an  analysis  of  statements. 

Major  Factors  in  Analysis  of  Balance  Sheet.     In  analyzing  a  balance- 
sheet  to  determine  the  financial  strength  of  a  business,  there  are  certain 
factors  to  be  considered.     Each  has  a  different  basis  and  serves  a  different 
purpose.    The  most  important  factors  of  balance  sheet  analysis  are: 

1.  Fixed  Capital 

2.  Working  Capital 

3.  Reserve  Strength 

4.  Liquid  Strength 

5.  Owned  Capital 

6.  Borrowed  Capital 

Each  of  these  factors  can  best  be  illustrated  by  the  balance  sheet  of  a 
typical  business,  such  as  the  Central  Manufacturing  Company,  reproduced 
in  Figure  1. 

1.  Fixed  Capital  is  that  capital  which  is  invested  in  the  fixed  assets  of 
the  business,  less  any  funded  or  fixed  indebtedness  which  applies  to  such 
property.  This  is  the  amount  which  has  been  permanently  placed  at  the 
service  of  the  business  as  the  basis  of  its  operations.  It  represents  the 
margin  by  which  the  physical  properties,  together  with  any  permanent  in- 
vestments, exceed  the  fixed  liabilities,  as,  for  example,  the  capital  funds 
furnished  by  the  owners  in  the  business. 

In  the  case  under  consideration  the  fixed  capital  is  determined  as 
follows : 

Plant  Property,  (Net) $321,500.00 

Investments,  Rex  Lumber  Company  Bonds 20,000.00 


Total $341,500.00 

Less— First  Mortgage  Bonds  200,000.00 

Fixed  Capital $141,500  00 


The  amount  of  fixed  capital  is  an  important  factor  of  comparison  in  the 
analysis  of  any  enterprise.  It  indicates  the  funds  tied  up  in  properties 
that  are  more  or  less  inactive,  except  as  a  means  of  producing  the  product 
or  service  that  is  being  rendered. 

Assignment  30,  Page  2 


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Assignment  30,  Page  3 


2.  Working  Capital  is  that  portion  of  capital  that  is  being  actively 
used  in  operations.    It  is  determined  by  the  following  calculation : 

Current  Assets  £586,000.00 

Deferred  Charges  3,000.00 

Total $589,000.00 

Less  Current  Liabilities  275,000.00 

Working  Capital $314,000.00 

The  amount  of  working  capital  represents  the  funds  immediately  avail- 
able for  financing  the  operations  of  the  near  future.  Like  fixed  capital  it 
is  very  useful  as  a  factor  for  comparison. 

3.  Reserve  Strength  is  represented  by  the  value  of  all  assets  in  excess 
of  the  current  liabilities. 

Current  Assets  $586,000.00 

Investments 20,000.00 

Plant  Property  321,500.00 

Total $927,500.00 

Less  Current  Liabilities  275,000.00 

Reserve  Strength  $652,500.00 


This  computation  is  of  especial  interest  to  the  banker  negotiating  a 
loan,  since  it  indicates  the  security  in  excess  of  the  current  demands  of 
the  business. 

4.  Liquid  Strength  is  represented  by  the  total  of  the  assets,  which  can 
be  liquidated  into  cash  within  a  reasonably  short  time  under  normal  con- 
ditions. For  the  Central  Manufacturing  Company  the  liquid  strength 
would  be : 

Cash S  11,000.00 

Notes  Receivable  75,000.00 

Accounts  Receivable 235,000.00 

Finished  Goods  25,000.00 

Liquid  Strength $346,000.00 


This  is  also  of  especial  interest  to  the  banker  as  it  shows  the  amount 
available  for  the  immediate  liquidation  of  current  liabilities.  Notes  Re- 
ceivable of  officers  and  employes,  $15,000.00,  consists  of  notes  that  will 
not  be  paid  within  a  reasonably  short  time.  For  this  reason  they  are  not 
included  here  in  determining  liquid  strength. 

5.  Owned  Capital,  sometimes  called  "Invested  Capital,"  designates  the 
capital  paid  in  and  earned  and  is  represented  by  capital  stock  and  surplus. 
In  the  case  of  the  Central  Manufacturing  Company  the  owned  capital 
would  consist  of  preferred  and  common  stock  and  surplus. 

Assignment  30,  Page  4 


Capital  Stock: 

Preferred  $100,000.00 

Common 200,000.00 


Total $300,000.00 

Surplus  155,500.00 

Owned  capital  $455,500.00 


The  owned  capital  is  considered  very  important  in  negotiating  loans  as 
it  represents  the  equity  of  the  owners,  which  in  case  of  bankruptcy  or  dis- 
solution, is  an  additional  security  to  the  holders  of  unsecured  claims  against 
the  business. 

6.  Borrowed  Capital  is  that  part  of  capital  which  has  been  obtained 
from  outside  sources.  It  includes  both  the  funded  debt  and  the  current 
liabilities.    In  the  case  before  us  it  consists  of  the  following: 

Current  Liabilities $275,000.00 

Funded  Debt , 200,000.00 

Borrowed  Capital  $475,000.00 


Since  certain  forms  of  indebtedness  are  usually  secured  by  definitely 
designated  properties,  either  thru  a  mortgage  or  by  assets  assigned  as 
collateral,  it  is  important  that  borrowed  capital  be  considered  in  its  rela- 
tion to  the  security  given.  The  amount  of  borrowed  capital,  as  a  whole,  is 
however,  one  of  the  principal  factors  in  testing  the  financial  strength  of 
any  enterprise. 

Comparisons  Provided  by  Major  Factors.  By  the  use  of  certain  com- 
parisons in  the  major  factors  of  a  balance  sheet,  some  very  interesting 
facts  regarding  financial  strength  can  be  obtained.  First  we  shall  sum- 
marize these  factors,  together  with  the  amounts,  so  that  we  can  more 
easily  see  certain  relations. 

1.  Fixed  Capital  $141,500.00 

2.  Working  Capital  314,000.00 

3.  Reserve  Strength 652,500.00 

4.  Liquid  Strength  346,000.00 

5.  Owned  Capital  455,500.00 

6.  Borrowed  Capital 475,000.00 

We  thus  see  that  for  every  $100.00  of  owned  capital  invested  in  the 
enterprise  there  is  $31.06  employed  as  fixed  capital  and  $68.94  as  working 
capital.  This  means  that  over  two-thirds  of  the  invested  capital  is  being 
used  in  the  active  operations  of  manufacturing  and  trading.  It  also  indi- 
cates that  the  permanent  properties  back  of  the  stockholders'  interest  and 
their  securities,  in  case  of  forced  dissolution,  are  very  small. 

Another  interesting  and  important  fact  is  that  there  is  now  $104.00  of 
borrowed  capital  for  every  $100.00  invested  by  the  owners. 

The  reserve  strength  of  the  business  indicates  that  there  is  $326.25 
worth  of  assets  for  each  $100.00  of  funded  debt,  and  $143.35  worth  of 
assets  for  each  $100.00  of  invested  capital.    This  would  seem  to  indicate 

Assignment  30,  Page  5 


that  altho  the  credit  of  the  business  had  been  used  to  a  considerable  ex- 
tent, the  creditors  as  well  as  the  owners  were  well  protected. 

Since  the  current  liabilities  amount  to  $275,000.00  and  the  liquid 
strength  stands  at  $346,000.00,  it  is  evident  that  there  is  $125.82  of  liquid 
assets  to  satisfy  every  $100.00  of  such  claims. 

Ratios  an  Aid  in  Analysis.  The  above  comparisons  show  that  valuable 
relationships  can  be  worked  out  for  every  balance  sheet.  When  calculated 
on  the  basis  of  $100.00  it  even  provides  more  convenient  standards  for 
comparing-  one  balance  sheet  with  another,  and  thus  weighing  their  rela- 
tive financial  strength.  Certain  credit  men  have,  therefore,  established 
fixed  ratios,  which  provide  a  uniform  method  for  testing  almost  any 
business.  _1 

These  ratios  may  be  grouped  under  two  main  divisions: 

Static  Ratios: 

1.  Current  Assets  to  Current  Liabilities 

2.  Accounts  Receivable  to  Inventoi'ies 

3.  Total  Debt  to  Owned  Capital 

4.  Owned  Capital  to  Noncurrent  Assets 
Velocity  Ratios: 

1.  Sales  to  Trade  Receivables 

2.  Sales  to  Inventories 

3.  Sales  to  OwTied  Capital 

4.  Sales  to  Noncurrent  Assets 

The  ratios  in  the  first  group  are  called  static  because  they  represent  the 
condition  of  the  business  as  reflected  by  the  state  of  the  assets  and  liabili- 
ties at  a  given  date;  viz.,  the  date  of  the  balance  sheet.  They  serve  as  a 
sort  of  quantitative  analysis  of  the  financial  factors  based  on  totals. 

Ratios  in  the  second  group  are  termed  velocity  ratios  because  they  indi- 
cate the  activity  of  the  business  as  reflected  thru  the  volume  of  sales.  This 
might  be  called  a  qualitative  analysis,  since  it  tends  to  show  the  possible 
activity  of  the  business. 

Using  the  facts  presented  on  the  balance  sheet  of  the  Central  Manufac- 
turing Company,  in  Figure  1,  we  shall  make  an  application  of  each  of  the 
ratios  which  have  been  mentioned. 

THE  STATIC  RATIOS 

1.  The  Ratio  of  Current  Assets  to  Current  Liabilities. 

Current  Assets  $586,000.00 

Current  Liabilities 275,000.00 

$586,000.00  2.13 

Ratio= = =  2.13  to  1 

$275,000.00    1 

The  above  ratio  of  2.13  to  1  indicates  a  good  financial  condition.  The 
ratio  of  2  to  1  is  usually  considered  fair  and  anjrthing  above  that  consid- 

Assignment  30,  Page  6 


ered  good.  This  ratio  may  fluctuate  to  such  an  extent  that  it  would  be 
impossible  to  fix  a  standard,  hence  all  conclusions  should  be  drawn  from 
the  individual  ratios.  A  showing  of  2.13  per  cent  denotes  the  ability  to 
liquidate  all  liabilities  with  a  1.13  per  cent  free  capital  for  other  purposes. 

This  ratio,  which  is  very  often  spoken  of  as  the  "current  ratio,"  may 
very  properly  be  termed  the  "pulse  of  a  business."  It  is  generally  held 
that  a  ratio  of  2  to  1  is  a  fair  average  for  most  businesses  under  normal 
conditions.  If  the  ratio  drops  below  the  adopted  standard  it  would  un- 
doubtedly denote  that  the  credit  condition  is  growing  poorer,  while  an 
increase  would  denote  a  general  improvement.  This  ratio  is  important 
and  shows  the  activities  and  trend  of  a  business  in  a  manner  which,  under 
ordinary  conditions,  may  be  relied  upon.  The  current  ratio  may  change  at 
difl['erent  periods  due  to  the  following  conditions: 

Ratio  decreasing  as  a  result  of: 

1.  Inability  to  liquidate  current  assets  while  current  liabilities  are  increasing. 
This  might  be  occasioned  by  a  decrease  in  collections  or  a  decline  in  the 
rate  of  turnover,  with  a  normal  amount  of  purchases. 

2.  Conversion  of  current  to  fixed  assets  thru  the  medium  of  capital  additions. 
Large  amounts  of  working  capital  expended  for  capital  additions  without 
additional  borrowed  capital. 

Ratio  increasing  as  a  result  of: 

1.  Increase  in  sales. 

2.  Cash  contributions  by  the  stockholders. 

3.  Cash  received  thru  sales  of  stock  or  bonds.  This  results  in  an  increase  in 
current  assets  without  increasing  the  current  liabilities. 

The  ratio  of  Current  Assets  to  Current  Liabilities  is  commonly  used 
for  determining  the  financial  strength  prior  to  negotiating  short  term 
loans  or  gi-anting  a  line  of  credit  by  a  financial  institution.  This  ratio  may 
be  used  to  advantage  in  any  line  or  form  of  business. 

2.  The  Ratio  of  Accounts  Receivable  to  Inventories. 

Accounts  Receivable $200,000.00 

Merchandise 250,000.00 

$200,000.00  .8 

Ratio= =  —  =.8  to  1,  or  8  to  10 

$250,000.00   1 

This  ratio  indicates  sufficient  inventories  on  hand,  if  converted  into 
sales,  to  produce  more  than  the  present  Accounts  Receivable. 

In  connection  with  this  ratio  it  is  important  to  remember  that  this 
method  involves  the  element  of  profit  in  the  merchandise  sold,  that  is,  the 
sales  when  made  and  entered  as  Accounts  Receivable  contain  an  element 
of  profit  which  is  not  considered  in  the  inventory. 

The  company  has  adopted  4/10 — 2/30 — Net  60,  as  the  terms  of  credit. 
Assuming  the  average  net  profit  of  the  Central  Manufacturing  Company 
to  be  20  per  cent,  the  adjusted  ratio  because  of  the  profit  element  would 
then  be: 

Assignment  30,  Page  7 


Accounts  Receivable $200,000.00 

Less  Profit  20% 33,333.33 

Accounts  Receivable— Cost  Value $166,666.67 

Accounts  Receivable— Cost  Value $166,666.67 

Inventories 250,000.00 

$166,666.67  .67 

Ration = =.67  to  1 

$250,000.00   1 

The  Accounts  Receivable  are  thus  found  to  be  equivalent  to  two-thirds 
of  the  present  inventories.  This  denotes  sufficient  inventories  on  hand  to 
supply  the  production  requirements  for  a  period  of  ninety  days,  viz.: 
$166,666.67  ^  2  months  =  $83,333.33  X  3  months  =  $250,000.00,  being  the 
amount  of  the  present  inventory.  It  will  thus  require  up  to  ninety  days 
to  convert  the  merchandise  into  receivables  and  an  additional  thirty  to 
sixty  days  to  get  the  proceeds  collected. 

It  would  be  inadvisable  to  advocate  carrying  accounts  receivable  at  cost, 
since  this  would  not  disclose  the  actual  amount  due  as  a  result  of  sales. 
It  is  also  important  not  to  attach  too  much  significance  to  this  ratio  as  of 
any  single  date.  Averaged  over  several  periods,  however,  this  ratio  is  a 
valuable  guide  in  the  determination  of  proper  inventories. 

The  ratio  of  Accounts  Receivable  to  Inventories  is  usually  indicative  of 
business  normalcy.  A  company  maintaining  a  representative  ratio  of  Re- 
ceivables to  Inventories  is  usually  enjoying  a  uniform  volume  of  business. 

The  ratio  of  Accounts  Receivable  to  Merchandise  may  be  used  to  ad- 
vantage in  a  company  maintaining  a  fairly  representative  inventory,  for 
example,  manufacturers,  wholesalers,  retailers,  etc.  This  ratio  would  be 
of  little,  if  any,  value  when  applied  to  extractive  industries  such  as  lumber, 
mining,  etc.,  where  the  company  carries  small  inventories  of  outside  mer- 
chandise and  ships  its  own  product  simultaneously  with  the  production. 

3.  The  Ratio  of  Total  Debt  to  Owned  Capital. 

Total  Debt $475,000.00 

Owned  Capital 455,500.00 

$475,000.00  1.04 

Ratio= = =  1.04  to  1 

$455,500.00    1 

This  ratio  is  dependent  upon  conditions,  because  in  a  seasonal  business, 
when  the  buying  is  at  a  high  point,  the  ratio  would  rise,  and  when  the 
business  returned  to  a  normal  basis  the  debt,  due  to  a  decrease  in  current 
liabilities,  would  likewise  decrease.  During  this  entire  period,  however, 
the  net  worth  would  remain  at  practically  the  same  amount.  Hence  in 
weighing  the  value  of  this  ratio  the  average  for  a  year  would  seem  pref- 
erable to  that  of  a  given  time. 

This  information  is  of  special  value  to  a  new  company  depending  en- 
tirely upon  securing  its  capital  thru  the  sale  of  stock  or  thru  loans  from 
its  stockholders  or  other  individuals.  It  may  also  obtain  credit  in  the  form 
of  bank  loans  or  in  the  form  of  creditors'  accounts  by  purchasing  goods 

Assignment  30,  Page  8 


on  time.  Altho  in  many  instances  a  company  may  be  obliged  to  borrow, 
or  obtain  credit  as  a  means  of  financing  the  enterprise  during  the  early 
years  of  its  existence,  the  amount  of  credit  may  be  materially  reduced  thru 
the  acquisition  of  earned  capital  from  operations. 

The  ratio  of  the  Total  Debt  to  Owned  Capital  may  be  applied  to  any 
line  or  form  of  business  enterprise.  The  application  is  similar  to  the  ratio 
of  the  Current  Assets  to  Current  Liabilities ;  viz.,  it  is  used  as  a  basis  of 
determining  facts  regarding  the  portion  of  the  total  capital  as  owned  and 
borrowed. 

4.  The  Ratio  of  Owned  Capital  to  Noncurrent  Assets. 

Refer  to  the  balance  sheet  of  Figure  1,  and  list  the  noncurrent  assets. 
They  include  the  following: 

Investments $  20,000.00 

Plant  Property  321,500.00 

Deferred  Charges  3,000.00 

Total  Noncurrent  Assets $344,500.00 


The  owned  capital  is  $455,500.00,  hence  the  computation  would  be — 

$455,500.00  1.32 

Ratio= = =  1.32  to  1 

$344,500.00    1 

This  ratio  shows  clearly  the  disposition  of  the  owned  capital.  The  full 
amount  of  the  noncurrent  assets  may  be  purchased  out  of  the  owned  capital 
and  an  amount  equal  to  32  per  cent  of  this  value  remains  in  the  current 
assets. 

Two  other  cases  sho\\dng  the  application  of  this  ratio  to  certain  classes 
of  noncurrent  assets,  may  be  noted  as  follows : 

1.  Fixed  Assets.  Where  a  corporation  is  formed  and  incorporated  for 

the  purpose  of  manufacturing,  mining,  etc.,  the  capital  would  be  of  no 
value  unless  invested  in  a  manner  wherein  it  would  produce  additional 
capital,  hence  it  must  be  expended  in  part  for  land,  building,  machinery 
and  equipm'ent,  or  other  mining  property,  equipment,  leases,  etc.  Inas- 
much as  the  original  capital  was  expended  in  part  for  these  items,  capital 
derived  from  future  earnings  may  also  be  expended  likewise.  The  use  of 
a  ratio  tends  to  show  the  approximate  amount  of  the  original  and  earned 
capital  which  has  been  expended  for  the  fixed  properties. 

For  example  a  certain  corporation  in  one  of  the  western  states  showed 
the  following  ratio  of  owned  capital  to  fixed  assets : 

Owned  Capital,  December  31,  1921 

Capital  Stock  $1,500,000.00 

Surplus  500,000.00 

Total $2,000,000.00 

Total  Fixed  Property   $700,000.00 

Ratio  Owned  Capital  to  Fixed  Property 2.85  to  1 

Assignment  30,  Page  9 


This  same  corporation  during  1922  acquired  additional  fixed  properties 
valued  at  $200,000.00  and  earned  $75,000.00  from  operation.  The  ratio 
December  31, 1922,  appeared  as  follows: 

Owned  Capital,  December  31,  1922 

Capital  Stock  $1,500,000.00 

Surplus  575,000.00 

$2,075,000.00 

Total  Fixed  Properties  $900,000.00 

Ratio  Owned  Capital  to  Fixed  Property 2.3  to  1 

2.  Intangibles.  A  corporation  at  the  time  of  its  formation  frequently 
acquires  valuable  patents  in  return  for  a  certain  amount  of  the  capital 
stock.  These  patents  are  called  intangible  fixed  assets,  since  they  repre- 
sent an  investment  similar  to  that  of  the  fixed  properties.  That  is,  a  cer- 
tain value  has  been  acquired  thru  a  given  expenditure  of  a  part  of  the 
capital. 

To  illustrate  the  acquisition  of  intangible  property  and  its  relationship 
to  owned  capital,  the  following  formula  is  introduced: 

Net  Worth,  December  31,  1922 
Capital  Stock 

Authorized  and  Issued $1,500,000.00 

Surplus 500,000.00 

Total  $2,000,000.00 

Total  Intangibles $100,000.00 

Ratio  Owned  Capital  to  Intangibles 1  to  .20  or  5  to  1 

The  importance  of  the  ratio  of  Owned  Capital  to  Noncurrent  Assets  may 
thus  be  stated  as  two-fold,  viz : 

1.  It  may  disclose  a  tendency  to  deplete  the  resources  of  the  corporation  thru 
continuous  payment  of  overgenerous  dividends,  without  considering  the  neces- 
sity of  acquiring  other  property. 

2.  It  may  disclose  a  tendency  to  an  overinvestment  in  fixed  properties  thus  result- 
ing in  financial  embarrassment  or  disaster  because  of  insufficient  working 
capital. 

The  reason  given  under  (1)  can  be  corrected  since  this  would  only 
require  a  change  in  dividend  policy,  with  a  possible  provision  for  retaining 
the  profits  until  a  substantial  reserve  for  plant  extension  was  accumulated. 

Under  conditions  (2),  however,  the  corporation  meets  a  situation  which 
may  eventually  prove  to  be  disastrous  if  it  is  unable  to  bring  in  new  capital 
thru  loans  or  an  issue  of  securities. 

The  ratio  of  Owned  Capital  to  Noncurrent  Assets  is  of  special  value  in 
extractive  industries  where  the  greater  part  of  the  capital  may  be  invested 
in  timber  and  mining  lands  and  thus  be  of  a  very  permanent  nature.  The 
changes  in  ratio  would  then  be  brought  about  through  acquisition  of  addi- 
tional lands,  operating  those  owned,  and  increase  or  decrease  in  capital 
due  to  operations.    This  ratio  is  most  effective  when  used  in  connection 

Assignment  30,  Page  10 


with  branches  of  business  requiring  a  certain  investment  in  land,  buildings, 
equipment,  etc.  Where  the  capital  invested  in  noncurrent  assets  is  com- 
paratively small  as  compared  with  the  total,  the  ratio  loses  its  real  sig- 
nificance. 

THE  VELOCITY  RATIOS 

Having  clearly  denoted  the  relative  importance  of  balance  sheet  analy- 
sis by  the  application  of  static  ratios,  we  shall  now  take  up  the  velocity 
ratios,  which  serve  to  test  the  quality  of  the  assets  back  of  the  statement. 

As  the  term  "velocity"  denotes  activity,  the  ratios  of  this  group  are 
confined  to  comparison  of  sales  with  the  accounts  resulting  from  sales. 
These  accounts  are  as  follows: 

1.  Accounts  Receivable 

2.  Inventories 

3.  Owned  Capital 

4.  Noncurrent  Assets 

A  careful  study  of  these  accounts  will  illustrate  clearly  the  use  of 
velocity  ratios. 

1.  Sales  under  ordinary  terms  result  in  accounts  receivable. 

2.  Sales  come  from  inventories,  either  in  crude  or  converted  form  with  profit 
added. 

3.  Sales  produce  a  profit  or  loss  which  affects  the  owned  capital. 

4.  Sales  result  in  earnings,  which  may  be  used  for  the  purchase  of  noncurrent 
assets.     The  noncurrent  assets  are  essential  to  the  increase  of  sales  volume. 

Each  of  these  items  bears  a  direct  relation  to  the  others,  and  like  the 
static  ratios  shows  either  better  or  worse  financial  condition  at  different 
dates.  Let  us  assume  as  a  basis  for  illustration  that  the  net  sales  of  the 
Central  Manufacturing  Company  for  the  year  ending  December  31,  1922, 
amounted  to  $891,000.00. 

1.  The  Ratio  of  Sales  to  Accounts  Receivable.    This  ratio  serves  as  a 

means  of  determining  the  rapidity  of  collections.  It  denotes  the  average 
number  of  times  a  company  can  convert  its  merchandise  into  cash  during  a 
given  period.  For  example,  the  Central  Manufacturing  Company  is  selling 
merchandise  at  the  rate  of  $891,000.00  net,  annually.  This  would  repre- 
sent average  monthly  sales  of  $74,258.00. 

The  terms  of  credit  are  3/10 — 2/30 — Net  60,  and  previous  records 

show  that  most  of  the  trade  is  not  taking  advantage  of  discounts.  Most 
payments  are  made  upon  the  expiration  of  a  sixty-day  period.  What  val- 
ues should  be  represented  by  the  accounts  receivable  at  December  31,  1922? 

FACTS  AS  STATED 

Annual  Sales    $891,000.00 

Monthly  Average 74,258.00 

Accounts  Receivable $200,000.00 

$200,000.00     2.7 

Ratio= = =  2.7  to  1 

$74,258.00       1 

Assignment  30,  Page  11 


The  sales  for  the  last  two  months,  or  as  the  terms  of  credit  denote, 
sixty  days,  amount  to  $148,516.00.    Hence  we  have: 

Accounts  Receivable $200,000.00 

Sales  for  60  days 148,516.00 

Collections  in  arrears  $  51,484.00 


This  denotes  a  general  decline  in  collection  activity,  which  expressed 
in  terms  of  time  would  be: 

$51,484.00  -^-  $74,258.00  =  69/100  of  30  days,  or  approximately  21  days 
in  arrears. 

There  are  a  few  exceptions  to  this  rule  which  must  be  considered  in 
making  this  computation. 

1.  Fluctuation  in  Sales. 

2.  Fluctuations  in  Returns  and  Allowances. 

3.  Doubtful  Accounts  Included  in  Accounts  Receivable. 

In  the  preceding  paragraphs  the  plan  of  average  monthly  sales  was  in- 
troduced. It  should  be  borne  in  mind  that  averages  are  not  facts,  hence, 
in  drawing  final  conclusions  concerning  this  method  of  obtaining  ratios 
this  point  should  not  be  overlooked.  Merchandise  is  converted  into  ac- 
counts receivable  when  sales  are  made,  and  the  rapidity  of  conversion  is 
dependent  upon  capacity  and  demand. 

The  ratio  of  Sales  to  Accounts  Receivable  may  be  readily  apphed  in  all 
lines  of  business  where  the  credit  policy  is  consistent.  If  a  company  is 
operating  on  the  basis  of  part  cash  or  C.  0.  D.  sales  and  part  credit  sales, 
this  ratio  would  be  of  little  value  unless  confined  to  credit  sales.  On  the 
other  hand,  if  a  company  is  selling  entirely  on  uniform  terms  of  credit, 
this  ratio  can  be  used  with  very  good  results. 

2.  The  Ratio  of  Sales  to  Inventories.  Under  normal  conditions  this 
ratio  is  fairly  uniform  and  therefore  is  a  good  test  of  efficient  operations. 
A  corporation  maintaining  a  standard  average  of  sales  would  undoubtedly 
seek  to  maintain  a  more  or  less  uniform  inventory,  thus  avoiding  an  over- 
stocked condition. 

If  a  corporation  can  turn  its  merchandise  six  times  each  year,  the  maxi- 
mum requirement  at  a  given  date  would  be  a  supply  for  two  months.  If, 
at  any  date,  the  inventories  are  found  to  be  less  it  would  denote  a  shortage 
in  the  materials,  or  trying  to  work  on  too  close  a  margin.  On  the  other 
hand,  an  overstocked  condition  indicates  danger,  as  in  most  instances  ma- 
terials cannot  be  liquidated  without  a  heavy  loss.  The  tying  up  of  funds 
in  slowly  moving  materials  tends  to  increase  the  volume  of  capital  which 
is  more  or  less  inactive  or  unproductive. 

The  ratio  of  Sales  to  Inventories  may  be  used  to  advantage  w1i  ere  the 
company  is  engaged  in  a  manufacturing,  wholesale,  or  retail  business.  The 
merchandise  inventory  must  be  an  important  factor  in  the  operation  in 
order  to  be  of  any  value  in  establishing  a  ratio.  For  example,  a  mining  or 
lumber  company  might  sell  products  valued  at  many  thousands  or  millions 

Assignment  30,  Page  12 


of  dollars.  Their  inventory  under  ordinary  circumstances  would  consist 
of  a  small  amount  of  lumber,  camp  supplies,  repair  parts,  etc.  This  state- 
ment is  made  on  the  assumption  that  the  company,  as  is  most  generally 
the  case,  ships  the  lumber  as  soon  as  it  is  ready  for  shipment. 

Taking  the  facts  of  the  Central  Manufacturing  Company  the  computa- 
tion of  this  ratio  is  as  follows : 

Inventories  December  31,  1922 $250,000.00 

Net  Sales— year  ended  December  31,  1922 $891,000.00 

Cost  of  Sales  for  the  year  =  64.78 

Applying  this  percentage  we  have : 

$891, 000. 00X64. 78%  =  $577, 189. 80 

$577,189.80-7-12  =  $48,099.15   (monthly  requirement) 

$250,000.00^$48,099.15  =  5.19   (number  of  months  supply) 

$577,189.80     2.31 

Ratio  = = =  2.31  to  1 

$250,000.00        1 

The  significance  of  this  ratio  is  that  the  sales  are  equal  to  2.31  of  the 
total  inventories.  If  the  volume  of  sales  for  1923  is  maintained  equal  to 
those  of  1922,  it  will  be  necessary  to  purchase  materials  equivalent  to  2.31 
times  the  present  value  of  the  inventory.  This  ratio  will  therefore  be 
useful  in  making  plans  for  purchasing  and  production.  This  is,  of  course, 
based  on  the  assumption  that  it  is  desirable  to  carry  the  present  amount 
of  inventory. 

3.  The  Ratio  of  Sales  to  Owned  Capital.  The  purpose  of  developing  this 
ratio  is  to  determine  the  relative  use  of  capital  in  conducting  the  business. 
After  a  certain  ratio  has  been  established  as  to  the  amount  of  capital  nec- 
essary to  do  a  business  of  a  given  volume  of  sales,  any  fluctuation  will  in- 
dicate to  what  extent  capital  is  being  accumulated  beyond  profitable  in- 
vestment. 

Take  the  case  of  the  Central  Manufacturing  Company  for  1922: 

Net  Sales $891,000.00 

Owned  Capital 455,500.00 

$891,000.00  1.95 

Ratio= = =  1.95  to  1 

$455,500.00    1 

To  see  more  clearly  the  importance  of  this  ratio,  examine  the  ratios 
for  a  five-year  period,  as  follows: 

Owned 

Capital  Ratio 

$325,000.00  1.53   to  1 

335,500.00  1.64  to  1 

347,500.00  1.01   to  1 

420,000.00  1.66  to  1 

455,500.00  1.95  to  1 

Assignment  30,  Page  13 


Year 

Sales 

1918 

$500,000.00 

1919 

550,000.00 

1920 

350,000.00 

1921 

700,000.00 

1922 

891,000.00 

In  this  comparison  for  five  years  yon  see  that  sales  are  increasing  faster 
than  is  the  owned  capital  employed.  The  year  of  1920  makes  a  very  poor 
showing,  but  the  indication  for  the  five-year  period  is  that  the  capital  is 
well  invested  in  producing  sales. 

A  business  man  is  mostly  interested  in  securing  the  highest  possible 
earning  power  out  of  the  owned  capital.  The  increase  of  the  ratio  of  Sales 
to  0\\Tied  Capital  from  1.53  to  1.95  is  very  encouraging  and  significant. 

When  the  maximum  earning  power  of  the  owned  capital  has  been  estab- 
lished it  will  tend  to  remain  constant,  which  is  a  standard  of  importance 
in  future  financing. 

This  ratio  may  be  applied  to  any  class  or  form  of  business  with  equally 
accurate  results.  Unlike  many  other  ratios  which  require  certain  uni- 
formity of  values  in  order  that  accurate  results  may  be  obtained,  this  ratio 
may  be  applied  under  any  condition.  The  result  obtained  from  its  use  may 
be  influenced  by  the  following  factors : 

1.  Increase  or  Decrease  of  Paid-in  or  Earned  Capital. 

2.  Losses  sustained  from  operations  or  other  sources. 

4.  Ratio  of  Sales  to  Noncurrent  Assets.  There  is  a  tendency  in  most 
businesses  to  retain  a  certain  amount  of  their  surplus  for  the  purpose  of 
making  additions  to  their  plant  or  for  improvements  and  extensions.  Such 
a  policy  should  only  be  followed,  however,  when  the  requirements  of  the 
business  are  such  that  a  more  extensive  plant  is  profitable.  The  ratio  of 
Owned  Capital  to  Noncurrent  Assets,  as  pointed  out  under  the  static  ratios, 
serves  as  a  basis  for  indicating  whether  earnings  are  being  retained  in  the 
form  of  permanent  investment. 

A  test  is  needed  to  show  the  profitableness  of  such  investment,  however, 
and  that  is  found  in  the  ratio  of  Sales  to  Noncurrent  Assets.  A  compari- 
son for  a  period  of  years  would  serve  as  a  basis  of  ascertaining  the  mini- 
mum and  maximum  production  ratio  on  the  basis  of  a  uniform  investment 
in  noncurrent  assets. 

A  fluctuation  in  price,  however,  occurring  over  a  period  of  years,  would 
have  to  be  considered  in  connection  with  the  use  of  this  ratio.  Suppose, 
for  example,  the  prices  had  remained  uniform  for  a  period  of  five  years, 
with  a  uniform  volume  of  sales,  and  that  during  the  following  year  prices 
increased  by  an  average  of  25  per  cent.  The  sales  for  this  year  would  then 
amount  to  125  per  cent  of  those  of  the  previous  five  years.  How  would 
this  condition  affect  the  ratio? 

The  increase  of  25  per  cent  would  necessarily  denote  an  increase  in 
value,  but  not  an  increase  in  volume.  Therefore,  if  this  ratio  is  to  be  used 
as  a  reliable  basis  for  comparison,  the  ratio  of  actual  quantities  must  be 
compared  with  that  of  the  values,  and  due  consideration  should  be  given 
to  any  fluctuations  in  prices  which  may  have  occurred. 

Inasmuch  as  it  would  be  impossible  in  many  instances  to  ascertain 
quantities,  the  better  plan  would  seem  to  be  to  note  the  fluctuation  in  price 
and  adjust  the  sales  figure  by  eliminating  the  increase  in  price.  The  ad- 
justed figure  would  then  reflect  an  increase  in  volume,  and  might  safely 
be  used  in  determining  the  ratio  of  Sales  to  Noncurrent  Assets. 

Assignment  30,  Page  14 


The  formula  for  this  ratio  would  be : 

Sales       $891,000.00  2.77 


Noncurrent  Assets  $321,500.00    1 


■,  or  2.77  to  1 


Sales  are  not,  of  course,  dependent  upon  the  capital  invested  in  fixed 
assets,  but  there  is  a  fairly  definite  relation  between  the  investment  nec- 
essary for  production  and  the  volume  of  sales  produced  in  any  line  of 
business. 

The  ratio  of  Sales  to  Noncurrent  Assets  may  be  applied  to  those  kinds 
of  businesses  which  are  compelled  to  employ  a  part  of  their  capital  in 
fixed  or  producing  properties.  For  example,  companies  operating  mines, 
oil  wells,  and  producing  lumber  must  have  a  certain  amount  of  capital  in- 
vested in  lands  or  leases.  A  manufacturing  company  must  own  machinery 
and  equipment  suitable  for  the  manufacture  of  its  product.  On  the  other 
hand,  a  wholesale  or  retail  business  may  be  operated  in  rented  properties 
■with  a  comparatively  small  expenditure  for  equipment.  These  points  must 
be  taken  into  consideration  when  making  use  of  the  ratio. 

The  Application  of  Ratios  to  an  Abnormal  Business  Condition.     The 

Eastern  Manufacturing  Company  will  be  used  to  illustrate  an  abnormal 
condition.  This  concern  contemplates  an  enormous  growth  in  business  in 
the  near  future  and  therefore  expends  a  large  amount  of  its  working  capi- 
tal for  the  purchase  of  additional  buildings  and  plant  equipment.  The 
magnitude  of  its  plant  extensions  far  surpasses  the  present  requirements 
and  there  is  reason  to  believe,  owing  to  prospective  economic  conditions, 
that  the  greater  part  will  never  be  used  by  the  enterprise. 

The  corporation  may  obtain  a  small  amount  of  borrowed  capital  from 
banks  or  perhaps  a  greater  amount  thru  the  issue  of  first  mortgage  bonds. 
In  either  case  the  amount  received  will  be  inadequate  to  finance  future 
operations,  hence  the  corporation  will  experience  financial  difficulties.  An 
exceptional  change  in  economic  conditions  may  bring  relief,  but  this  is 
only  a  possibility  that  may  develop.  The  comparative  balance  sheet  shown 
in  Figure  2  illustrates  this  condition. 

Use  of  Static  Ratios.  A  careful  study  of  the  two  balance  sheets,  De- 
cember 31,  1921  and  1922,  reveals  an  exceptional  decrease  in  the  current 
assets  with  a  corresponding  increase  in  the  fixed  properties. 

The  changes  in  ratios  denote  a  similarity  in  amount  between  the  de- 
crease in  current  and  increase  in  fi.xed  assets. 

The  degree  of  change  in  the  ratios  appears  to  be  about  equal,  as  re- 
vealed in  the  following  comparison : 

Ratio  of  Current  Assets  to  Current  Liabilities: 

December  31,  1921 3.490  to  1 

December  31,  1922 1.002  to  1 

Decrease 2.488 

Ratio  of  Owned  Capital  to  Fixed  Assets: 

December  31,  1921 3.88  to  1 

December  31,  1922 1.007  to  1 

Decrease 2.873 

Assignment  30,  Page  15 


Use  of  Velocity  Ratios.  A  careful  survey  of  the  changes  occurring  in 
the  Fixed  Asset  Accounts  during  the  year  of  1922  discloses  an  increase  of 
$799,500.00.  As  stated  above,  the  company  expended  vast  amounts  of 
capital  for  fixed  properties,  far  in  excess  of  the  actual  requirements,  thus 
depleting  its  working  capital.    This  expenditure  was  made  in  anticipation 


The  Eastern  Manufacturing"2Company 
COMPARATIVE  BALANCE  SHEET,  December  31,  1921  a 

nd  1922 

ASSETS 

CURRENT  ASSETS 

Cash  on  Hand  and  in  Bank  .... 
Accounts  Receivable — Trade  .  .  . 

S 

1921  ;;; 

26,000.00 
575,000.00 

325,000.00 
250,000.00 
150,000.00 

s 

1922 

11,000.00 
200,000.00 

200,000.00 

150,000.00 

50,000.00 

Increase 

or 
♦Decrease 

*$  15,000.00 
♦375.000.00 

♦125,000.00 
♦100,000.00 
♦100,000.00 

Inventories: 

Raw  Material 

Work  in  Process  

Finished  Goods 

Total  Inventories 

S 

725,000.00 

s 

400,000.00 

♦$325,000.00 

Total  Current  Assets  

FIXED  ASSETS 

Land 

Buildings 

Machinery  and  Equipment 

.  .  .  . 

$1 

,326,000.00 

$ 

611,000.00 

♦$715,000.00 

$ 

30,000.00 

s 

150,000.00 

$  120,000.00 

$ 

200,000.00 

175,000.00 

10,000.00 

15,000.00 

100,000.00 

$800,000.00 

400,000.00 

10,000.00 

15,000.00 

125,500.00 

$600,000.00 
225,000.00 

♦25,500.00 

Automobiles  and  Trucks  

Furniture  and  Fixtures  

.  .  .  , 

Less  Reserve  for  Depreciation.  . 

Total  Fixed  Assets  

$ 

300,000.00 

$1 

,099,500.00 

$  799,500.00 

$ 

330,000.00 

$1 

,249,500.00 

$  919,500.00 

DEFERRED  CHARGES 

Insurance,  Stationery  and  Office 

Supplies 

s 

4,000.00 

$ 

7,000.00 

$   3,000.00 

$1 

,660,000.00 

$1 

,867,500.00 

S  207,500.00 

Figure  2.    This  comparative  balance  sheet  illustrates  how  a  policy  of  expansion  may 
cause  the  current  assets  to  be  expended  in  fixed  properties  and  thus  decrease  the  funds 
available  for  working  capital.    The  statement  is  prepared  according  to  the  method  out- 
lined in  Assignment  29.     The  form  directly  opposite  is  part  of  this  statement. 

of  an  increase  in  sales,  or  based  on  what  seemed  to  be  an  increasing  de- 
mand. On  account  of  economic  conditions  the  new  equipment  was  never 
used  to  the  full  capacity  and  extent  for  whicTi  it  was  intended.  Thus  the 
company  had  practically  all  of  its  owned  capital  invested  in  fixed  proper- 
ties, without  the  prospect  of  an  increase  in  sales  after  the  additional 
facilities  had  been  acquired. 

The  business  man  is  particularly  interested  in  determining  the  produc- 
tivity of  his  fixed  properties.  After  arriving  at  a  standard  or  average 
ratio,  or  possibly  attaining  a  high  mark  in  production,  he  will  subse- 
quently seek  to  maintain  this  average. 

Assignment  30,  Page  16 


An  average  ratio  is  also  valuable  in  outlining  a  conservative  construc- 
tion program.  A  firm  or  corporation  marketing  a  staple  product  and 
having  maintained  an  average  ratio  of  3  to  1  over  a  period  of  ten  years, 
could  reasonably  expect  to  continue  operations  on  this  basis.  In  such  cases 
additions  may  reasonably  be  justified  on  a  well  defined  schedule  of  sales. 


The  Eastern  Mam 
COMPARATIVE  BALANCE  SHEET 

ifacturing  Company 
December  31,  1921 

and  1922 

LIABILITIES  AND  CAPITAL 
CURRENT  LIABILITIES 

Notes  Payable — Banks  

Accounts  Payable: 

Trade  

Officers 

1921 
$  100,000.00 

$ 

1922 

100,000.00 

Increase 

or 
*Decrease 

$  230,000.00 

$  260,000.00 
5,000.00 

$ 

490,000.00 
5,000.00 

Total  Accounts  Payable 

Accruals: 

Wages  

$  265,000.00 

$ 

495,000.00 

$  230,000.00 

*$  2,000.00 
2,000.00 

$   10,000.00 
3,500.00 
1,000.00 

$ 

8,000.00 
5,500.00 
1,000.00 

Taxes  

Interest  

Total  Accruals  .  .  . 
Total  Current  Liabilities. 

.  .  . 

•  •  • 

.  $   14,500.00 

$ 

14,500.00 

230,000.00 

379,500.00 

609,500.00 

CAPITAL 

Capital  Stock 

Surplus 

•   •   • 

.  $1,000,000.00 
280,500.00 

SI 

,000.000.00 
258,000.00 

*$  22,500.00 

$1,280,500.00 

$1 

,258,000.00 

*$  22,500.00 

$1,660,000.00 

$1 

,867,500.00 

$  207,500.00 

Figure  2A.    This  fonn  is  a  part  of  Figure  2  on  opposite  page.    In  it  is  shown  the  right- 
hand    side    of   the    comparative    balance    sheet.    Asterisks    before    amounts    indicate 

deductions. 

Practical  Use  of  Ratios.  Thus  far  in  the  assignment  we  have  presented 
the  relative  value  of  individual  ratios.  It  is  important  to  remember  that 
a  still  greater  value  attaches  to  the  ratios  if  they  are  used  collectively  in- 
stead of  individually.  If  the  purpose  may  be  served  best  by  the  collective 
use  of  ratios,  the  statements  should  be  prepared  and  arranged  accordingly. 
When  the  statement  is  to  be  used  for  credit  purposes  the  various  ratios 
properly  applied  will  aid  materially  in  establishing  the  relationship  of  the 
accounts.  For  the  purpose  of  a  stockholder  some  of  the  ratios  would  ob- 
viously be  of  less  significance. 


Assignment  30,  Page  17 


MAIN  POINTS  IN  THIS  ASSIGNMENT 

The  more  important  points  brought  out  in  this  assignment  may  be 
briefly  summarized  as  follows: 

First.  An  analysis  of  financial  statements  should  produce  the  following 
information : 

1.  Ability  to  Meet  Obligations 

2.  Security  or  Value  Back  of  Owner's  Interest 

3.  Profit  Possibilities  ' 

Second.    Major  factors  entering  into  an  analysis  are: 

1.  Fixed  Capital  4.  Liquid  Strength 

2.  Working  Capital  5.  Owned  Capital 

3.  Reserve  Strength  6.  Borrowed  Capital 

Third.    The  ratios  may  be  divided  into  two  groups  as  follows: 

Static: 

1,  Ratio  of  Current  Assets  to  Current  Liabilities 

2,  Ratio  of  Receivables  to  Inventories 

3.  Ratio  of  Debt  to  Owned  Capital 

4.  Ratio  of  Owned  Capital  to  Noncurrent  Assets 

Velocity : 

1.  Ratio  of  Sales  to  Receivables 

2.  Ratio  of  Sales  to  Inventories 

3.  Ratio  of  Sales  to  Owned  Capital 

4.  Ratio  of  Sales  to  Noncurrent  Assets 

Fourth.    Ratios  may  be  termed  the  "pulse  of  a  business." 

The  current  ratio  may  recede  as  a  result  of: 

1.  Inability  to  Liquidate  Current  Assets  with  a  Corresponding  Increase  in 
Current  Liabilities 

2.  Conversion  of  Current  into  Fixed  Assets  thru  Capital  Additions 

It  increases  ordinarily  as  a  result  of: 

1.  Increase  in  Sales 

2.  Cash  Contributions  by  the  Stockholders 

3.  Cash  Received  thru  Sales  of  Stock  or  Bonds 

Fifth.  The  ratios  between  years  may  be  materially  changed  by  conversion 
of  current  into  fixed  assets. 

Sixth.  Ratio  of  Merchandise  to  Sales  is  directly  affected  by  method  of 
pricing  inventories,  fluctuation  in  sales,  prices,  etc. 

Seventh.  Inventory  of  retail  merchant  presents  a  peculiar  problem  in 
method  of  pricing. 

Eighth.  Sales  may  fluctuate  even  tho  the  net  worth  may  remain  perma- 
nent. Change  in  prices  affects  relative  value  of  ratio  of  Sales  to  Net 
Worth. 

Ninth.  Ratio  of  Sales  to  Noncurrent  Assets  is  of  especial  value  in  outlining 
future  policies. 

Assignment  30,  Page  18 


PROBLEMS  TO  BE  SOLVED  WITH  ASSIGNMENT  30 

Prepare  and  send  in  solutions  for  the  following  two  problems: 

1.  The  following  post-closing  trial  balances  of  the  Elm  wood  Manufac- 
turing Company  were  taken  from  the  general  ledger  on  December  31,  1921, 
and  1922. 


J 

Trial  Balances 

ELMWOOD  MANUFACTURING  CO.,  December  31,  1921,  and  1922 

1921 
Debits 

Cash $  10,000.00 

Accounts  Receivable 150,000.00 

Notes  Receivable 15  000.00 

Credits 

1922 
Debits      Credits 
S  12,500.00 
162,000.00 

15,000.00 
275,000.00 

25,000.00 

25,000.00 
155,000.00 
200,000.00 

35,000.00 

Inventories  300,000.00 

Investments  25,000.00 

Land 25,000.00 

Buildings  150,000.00 

Machinery  175,000.00 

Equipment  30,000.00 

Automobile  Trucks  10,000.00 

Furniture  and  Fixtures 15,000.00 

Prepaid  Insurance  2,000.00 

Reserve  for  Depreciation 

Notes  Payable  

Accounts  Payable 

Accrued  Wages  

$  30,000.00 

70,000.00 

85,000.00 

5,000.00 

7,000.00 

1,000.00 

400,000.00 

200,000.00 

109,000.00 

10,000.00 

15,000.00 

2,500.00 

S  48,750.00 

65,000.00 

75,000.00^ 

5,500.00 

7,500.00 

900.00 

400,000.00 

200,000.00 

129,350.00. 

Accrued  Taxes  

Accrued  Interest 

Capital  Stock,  Common  

Capital  Stock,  Preferred 

Surplus  

$907,000.00 

$907,000.00 

$932,000.00 

$932,000.00 

The  Accounts  Receivable  at  the  close  of  each  period  contain  the  follow- 
ing items 

1921  1922 

Trade  Customers  $130,000.00  $150,000.00 

Advances  on  Purchases  15,000.00  10,000.00 

Officers 5,000.00  2,000.00 

Total  Accounts  Receivable $150,000.00  $162,000.00 


The  inventories  are  composed  of  three  classes : 

Raw  Materials   $175,000.00  $150,000.00 

Work  in  Process   75,000.00  80,000.00 

Finished  Goods 50,000.00  45,000.00 

Total  Inventories $300,000.00  $275,000.00 


Assignment  30,  Page  19 


The  Accounts  Payable  contain  the  following  balances: 

1921        1922 

Trade  Creditors  $  80,000.00  $  72,500.00 

Employes 5,000.00    2,500.00 

Total  Accounts  Payable  $  85,000.00  $  75,000.00 


From  the  trial  balances  and  the  supplementary  facts  you  are  asked  to 
prepare : 

(a)  A  comparative  balance  sheet  as  of  December  31, 1921,  and  1922. 

(b)  Compute  and  tabulate  the  following  for  December  31,  1922 : 

1.  Fixed  Capital 

2.  Working  Capit&l 

3.  Reserve  Strength 

4.  Liquid  Strength 

5.  Owned  Capital 

6.  Borrowed  Capital 

(c)  Compute  the  static  ratios  for  December  31,  1922. 

2.  The  Southwestern  Hardware  Company  experiences  financial  difficul- 
ties due  to  a  shortage  in  working  capital.  The  following  balance  sheet  is 
prepared  and  submitted  to  their  bankers  with  the  idea  of  securing  a  loan. 


The  Southwestern  Hardware  Company 
BALANCE  SHEET,  December  31,  1922 


ASSETS 

Cash $  10,000.00 

Accounts  Receivable 300,000.00 

Inventory 200,000.00 

Buildings 200,000.00 

Equipment 20,000.00 

Prepaid  Insurance 1,000.00 


$731,000.00 


LIABILITIES  AND  CAPITAL 

Notes  Payable $200,000.00 

Accounts  Payable  250,000.00 

Accrued  Items 10,000.00 

Reserve  for  Depreciation  .  .  .  50,000.00 

Capital  Stock 200,000.00 

Surplus 21,000.00 


$731,000.00 


In  addition  to  this,  the  company  furnishes  a  profit  and  loss  statement 
for  the  three  years,  ended  December  31,  1922.     (Shown  on  page  21.) 

On  January  2,  1923,  the  bank  decided  to  grant  a  loan  of  $200,000.00  to 
the  Southwestern  Hardware  Company.  One-half  of  this  loan  is  covered  by 
a  mortgage  on  the  buildings.  The  balance  of  this  loan  is  given  for  notes 
of  the  company  which  will  mature  within  one  year. 

The  bank  credits  the  $200,000.00  to  the  account  of  the  Southwestern 
Hardware  Company.  On  January  3  the  company  pays  $175,000.00  of  its 
accounts  payable. 


Assig^nment  30,  Page  20 


Southweetern  Hardwa 
PROFIT  AND  LOSS  STATEMENT,  for 

re  Company 
1920,  1921  and  1922 

Net  Sales  

Cost  of  Sales  

1920 
.  $600,000.00 
450,000.00 

1921 
$750,000.00 
610,000.00 

1922 

$730,000.00 

605.000.00 

y 
Gross  Profit 

Selling  Expenses: 
Salesmen's  Salaries  

$150,000.00 

$140,000.00 

$125,000.00 

$  30,000.00 
30,000.00 
10,000.00 

$  25,000.00 
37,500.00 
15,000.00 

$  25,000.00 
35,000.00 
12,000.00 

Salesmen's  Commissions 

Traveling  Expenses 

Total  Selling  Expenses 

Net  Trading  Profit 

Administrative  and  General  Expenses: 

$  70,000.00 

S  77,500.00 

$  72,000.00 

S  80,000.00 

$  62,500.00 

$  53,000.00 

$  20,000.00 
5,000.00 
1,000.00 
2,500.00 
1,500.00 
200.00 
3,500.00 

$  17,000.00 
4,000.00 
800.00 
2,000.00 
1,750.00 
250.00 
2,500.00 

S  17,000.00 

3,000.00 

900.00 

1,800.00 

i.eoo.oo 

200.00 
1,300.00 

Office  Salaries  

Office  Supplies  and  Stationery 

Taxes  

Insurance  

Miscellaneous  Expenses 

Total  Administrative  Expenses  

Net  Profit  for  Period  

$  33,700.00 

$  28,300.00 

$  25,800.00 

S  46,300.00 

$  34,200.00 

S  27,200.00 

From  these  facts  you  are  asked  to  prepare  the  following : 

(a)  A  classified  balance  sheet  as  of  December  31,  1922,  immediately 
before  the  loan  was  negotiated. 

(b)  A  classified  balance  sheet  as  of  January  3,  1923,  after  the  new 
capital  and  the  payment  of  t^ie  accounts  payable  have  been  re- 
corded. 

(c)  Compute  the  static  ratios  for  both  balance  sheets. 

(d)  Compute  the  velocity  ratios  at  the  close  of  each  of  the  three 
years,  using  the  following  amounts,  in  addition  to  the  state- 
ments presented  above. 

1920  1921 

Accounts  Receivable  $200,000.00  $350,000.00 

Inventory   150,000.00  250,000.00 

Net  Worth  205,000.00  231,300.00 

Noncurrent  Assets  140,000.00  160,000.00 

Draw  any  conclusions  as  to  facts  or  tendencies  disclosed  by  these  ratios. 


1 


Assignment  30,  Page  21 


Higher  Accountancy 

PRINCIPLES 
PRACTICE  en/ 
PROCEDURE 


Elements  of  Accounting  Practice 


GENERAL  INDEX  AND  CONTENTS 


A  Working  Guide  to  the  Course 


LaSalle  Extension  University 

Chicago 


NHA-31 


Copyright.  1923 
Rights  Reserved  in  All  Countries 
LaSallf  Extension  University 
Printed  in  the  U.  S.  A. 


HOW  TO  USE  THE  INDEX 
FOR  ELEMENTS  OF  ACCOUNTING  PRACTICE 

The  index  which  follows  is  a  working  guide  for  use  in  your  study  of  the  assign- 
ments in  Elements  of  Accounting  Practice.  It  has  been  planned  for  easy  and 
instructive  reference. 

First  a  table  of  contents  for  the  thirty  assignments  shows  the  main  subjects 
developed  in  each  assignment.  This  will  enable  you  to  survey  quickly  the  content 
of  the  entire  course. 

Then  follows  a  complete  alphabetical  index  listed  by  subjects.  Take,  for  ex- 
ample, Classification  of  Accounts.  Everything  that  is  given  on  this  subject  is  prop- 
erly listed  under  that  heading.  It  shows  not  only  the  material  contained  in  the 
assignment  on  the  Classification  of  Accoimts,  but  also  all  references  to  this  subject 
in  other  assignments.  By  referring  to  the  heading.  Classification  of  Accounts,  and 
its  subtitles,  you  can  study  the  subject  in  its  entirety,  including  its  major  treatment 
and  every  application  thruout  the  course.  The  same  is  true  of  other  subjects  as 
Depreciation,  Capital,  Accrued  Items,  etc. 

The  main  accounting  subjects  are  cross-indexed.  If,  for  example,  you  wish 
information  on  posting  the  cash  journal  you  will  find  it  as  one  of  the  subheadings 
under  Posting  or  you  will  find  an  item  on  Posting  under  Cash  Journal.  By  trying 
all  the  possible  subjects  under  which  any  item  for  which  you  are  looking  might  be 
found,  you  will  be  able  to  secure  a  complete  reference. 

The  references  for  each  assigrmient  are  made  by  showing  the  number  of  the 
assignment  in  italic  type  followed  by  the  page  numbers  in  such  assignment.  Thus 
the  reference  5-17,  18,  22  indicates  Assignment  6,  pages  17,  18,  and  22.  If  the  sub- 
ject is  discussed  in  more  than  one  assignment,  the  various  references  are  shown,  as 
follows:  5-8,  9,  11;  lI^-2,  9.  The  symbol  {0)  refers  to  the  introductory  folder; 
T.  P.  to  the  title  page  of  each  assigrmient. 

The  Index  will  save  your  time.  The  complete  list  of  subjects  treated  gives  you 
a  clear  idea  of  the  thoro  manner  in  which  these  assignments  have  been  covered  and 
the  comprehensive,  basic  training  which  they  afford.  The  Index  will  help  you  to 
review  this  work  from  time  to  time.  It  will  afford  you  an  opportunity  to  test  your- 
self on  any  point  with  which  you  have  had  difficulty.  It  will  also  be  a  great  con- 
venience in  looking  up  points  on  which  you  desire  information.  It  will  help  you 
find  quickly  how  to  deal  with  the  himdred  or  more  everyday  problems  which  may 
come  up  for  solution  or  which  your  investigative  mind  wishes  to  check  against  the 
basic  accounting  principles  developed  in  these  assignments  and  the  sound  procedure 
which  is  pointed  out  in  every  application. 

The  Index,  therefore,  and  its  use  are  of  vital  importance  to  the  fullest  develop- 
ment of  your  accounting  training.  If  you  use  the  Index  in  the  manner  suggested, 
you  will  find  it  to  be  just  as  valuable  as  any  one  of  the  assignments. 


ASSIGNMENT  CONTENTS 
ELEMENTS  OF  ACCOUNTING  PRACTICE 

Numbers  refer  to  pages  of  each  Assignment 

Introductory  Assignment — The  Starting  Point  in  Accountancy 
Importance  of  Accounting  to  Business,  1 
How  Accounting  Practice  Began,  2 
Primitive  Records,  3  to  6 
The  Double  Entry  Principle,  7 
Modern  Accounting  Practice,  8 
Outline  of  Higher  Accountancy  Course,  8  to  10 

Assignment  I^The  Balance  Sheet 

Accounting  Distinguished  from  Bookkeeping,  1 
Balance  Sheet  Shows  Financial  Condition,  2 
Form  of  Balance  Sheet,  4 

Assets,  Liabilities  and  Net  Worth  Explained,  3  to  8 
Proprietorship  Equation  Illustrated,  9  to  11 
Balance  Sheet  an  Aid  to  Business  Control,  12  to  14 

Assignment  2 — The  Profit  and  Loss  Statement 
Report  of  Business  Progress,  1 
Form  of  Profit  and  Loss  Statement,  2,  3 
Details  of  the  Statement,  3  to  6 
Three  Profit  Items,  6 
Important  Uses  of  Statement,  8  to  10 
How  Related  to  Balance  Sheet,  12 

Assignment  3 — The  General  Ledger 

Classification  of  Business  Transactions,  1 
What  Is  an  Account,  1 
How  Ledger  Accounts  Are  Divided,  2 
Meaning  of  Debit  and  Credit,  3 
Double  Entry  Explained,  7  to  9 
Trial  Balance  Illustrated,  10  to  12 

Assignment  4 — Closing  the  Ledger 

Summary  of  Ledger  Necessary,  1 
When  Closed,  2 

Three  Steps  in  Closing  Process,  5  to  12 
Various  Methods  of  Closing,  12  to  14 

Assignments — The  Journal 

Developed  from  Old  Day  Book,  1 
Advantages  of  Journal,  1  to  2 
Journalizing  and  Posting,  3  to  10 
Practical  Suggestions  on  Posting,  10 

Page  2 — Contents 


Assignment  6 — Closing  the  Ledger  by  Journal  Entries 
Advantages  of  Journal  Entry  Method,  1 
How  Journal  Entry  Figures  Are  Determined,  3 
Mechanics  of  Closing  Illustrated,  4  to  6 

Assignment  7— The  Cash  Journal 

Methods  of  Safeguarding  Cash,  1 
Advantages  of  Using  Cash  Journal,  1  to  3 
Entries  in  Cash  Journal,  4  to  5 
How  Posted,  6,  7 
When  Balanced,  7 

Assignment  8 — ^Merchandise  Records 
The  Purchase  Routine,  1  to  3 
Advantages  of  Purchase  Journal,  4 
Purchase  Journal  Illustrated,  5 
Selling  Process  Analyzed,  8 
Sales  Journal  Illustrated,  11 
Sales  Returns  and  Allowance  Book,  14,  15 
Credit  Memos,  15,  16 

Assignment  9 — Subdivision  of  the  Ledger 
Need  for  Subdivision,  1,  2 

Subsidiary  Ledger  for  Customers  and  Creditors,  3  to  16 
Relation  of  Subsidiary  Ledgers  to  General  Ledger,  17 
Meaning  of  Controlling  Accounts,  18 
Advantages  of  Controlling  Accounts,  19 

Assignment  10 — Columnization 

Principle  of  Columnization,  1 
Designing  Books  of  Original  Entry 

Simple  Journal,  1 

Columnar  Journal,  1,  2 

Multicolumnar  Journal,  3 

Sales  Journal,  6 

Purchase  Journal,  8 

Cash  Journal,  9 
Methods  of  Handling  Cash  Discounts 

In  Cash  Journal,  13 

Thru  General  Journal,  13,  14 

Assignment  11 — Accounting  Procedure  for  Promissory  Notes 
Importance  of  Notes  in  Business,  1 
Standard  Form  of  Notes,  1,  2 
Parties  to  Note,  2,  3 
Negotiable  Instruments,  2,  3 
Entries  for  Notes 

When  Issued,  4 

When  Transferred,  5,  6 

When  Paid,  7,  8 

When  Dishonored,  9 
Various  Kinds  of  Indorsement,  5,  6 
Notes  Receivable  Discounted,  7 
Interest  and  Discount,  12  to  18 
Special  Books  for  Notes,  19  to  22 

Contents — Page  3 


Assignment  12— Drafts,  Trade  Acceptances,  and  Bills  of  Lading 
Different  from  Promissory  Notes,  1 
Various  Kinds  of  Drafts,  1  to  3 
Form  of  Draft,  2,  3 
Entries  for  Drafts 

By  Drawer,  3 

By  Drawee,  4 

By  Payee,  5 

When  Discounted,  5,  6 
Purpose  of  Trade  Acceptances,  7 
Entries  for  Trade  Acceptances,  8 
Bills  of  Lading,  9 
Various  Kinds  of  Commercial  Paper,  9  to  11 

Assignment  13— Auxiliary  Cash  Records 
Petty  Cash  Fund,  1 
Methods  of  Handling  Petty  Cash,  1,  2 
Operation  of  Imprest  System,  2  to  5 
Other  Petty  Cash  Systems,  5,  6 
Entries  for  Cashed  Checks,  5,  6 
Use  of  Check  Register,  7,  8 
Reconciling  Bank  Balance,  8  to  13 
Verifying  Cash  Book  Balance,  13,  14 
Cash  Over  and  Short  Book,  14,  15 

Assignment  14 — Sundry  Auxiliary  Books  and  Business  Records 
Purpose  of  Auxiliary  Books,  1 
Insurance  Register,  1,  2 
Car  Record  Book,  2,  3 
Pay  Roll  Book,  3  to  5 
Inventory  Book,  5,  6 
Trial  Balance  Book,  6 
Sales  Ticket  File,  7 
Cash  Register  Strip,  7 
Business  Papers,  8  to  13 
Sales  Invoices,  8,  9 
Journal  Bill,  9 
Purchase  Invoices,  9,  10 
Receiving  Records,  11 
Stores  Records,  11 
Credit  Memos,  12 
Statement  of  Account,  12 
Bill  of  Lading,  12,  13 

Assignment  15— Finding,  Correcting,  and  Preventing  Errors 
Effect  of  Errors,  1 
Causes  of  Errors,  2 
Finding  Errors 

In  Trial  Balance,  3  to  6 
In  General  Ledger,  7 
In  Books  of  Original  Entry,  6,  7 
Reverse  Posting,  8  to  11 
Correcting  Errors,  11  to  13 
Preventing  Errors,  13  to  15 
Page  4 — Contents 


Assignment  16— Periodic  Adjustments  for  Accrued  and  Deferred  Items 

Failure  to  Make  Adjustments,  1  to  4 

Accrued  Items,  4,  5 

Deferred  Items,  5,  7 

Two  Methods  of  Handling  Deferred  Items,  7 

Working  Sheet,  8  to  10 

Adjusting  Journal  Entries,  10 

Effect  of  Adjustments  on  Statements,  11  to  13 

Assignment  17— Periodic  Adjustments  for  Depreciation  and  Uncollectible 
Accounts 

Depreciation  an  Operating  Expense,  1 

Causes  of  Depreciation,  2,  3 

Adjustments  for  Depreciation,  3  to  6 

Determination  of  Rate,  7 

Retirement  of  Assets,  7,  8 

Replacement  of  Assets,  9 

Two  Methods  of  Recording  Bad  Debts,  10,  11 

Reserves  on  Balance  Sheet,  11 

Reserves  on  Working  Sheet,  12 

Assignment  18 — Partnership  Accounting 

Partnership  Agreement,  1,  2 
Opening  Entries,  2  to  7 
Adjustments  Between  Partners,  7  to  13 
Partnership  Insurance  Account,  13,  14 

Assignment  19 — Partnership  Accounting,  Dissolution  Problems 

Causes  of  Dissolution,  1,  2 
Entries  for  Dissolution 

Without  Liquidation,  3  to  13 

With  Liquidation,  13  to  16 

Installment  Distribution,  15,  16 
Special  Partnerships 

Limited  Partnerships,  16,  17 

Joint  Stock  Companies,  17 

Joint  Ventures,  17  to  19 

Assignment  20 — Corporation  Accounting,  Formation  and  Operation 

Corporation  Defined,  1 

Subscriptions  for  Capital  Stock,  3 

Entries  for  Issue  of  Stock,  3  to  5 

Special  Books,  5  to  9 

Kinds  of  Capital  Stock,  9  to  11 

Accounts  Peculiar  to  Corporations,  11  to  14 

Corporation  Statements,  14,  15 

Assignment  21— Corporation  Accounting,  Reorganizations  and  Mergers 

Difference  Between  Reorganizations  and  Mergers,  1,  2 
Consolidation  and  Merger,  1,  2 
Accounting  Procedure,  2  to  12 

Contents — Page  5 


Assignment  22— The  Voucher  System 

How  it  Meets  the  Need  of  a  Growing  Business,  1 

System  Defined  and  Explained,  2 

Voucher  Check,  2,  3 

Office  Voucher,  3  to  5 

Form  of  Voucher  Register,  6 

How  System  Is  Started,  7  to  11 

Entries  in  Voucher  and  Check  Registers,  10  to  15 

Unpaid  File,  16 

Index  of  Creditors,  16 

Purchase  Returns  and  Allowances,  18 

Partial  Payments,  18 

Journal  Vouchers,  19,  20 

Advantages  of  System,  21 

Assignment  23 — Factory  Accounting,  Manufacturing  Statement 
Increase  in  Manufacturing,  1 
Manufacturing  Accounts  v.  Trading  Accounts,  1,  2 
Elements  of  Cost  of  Production,  2  to  4 
Entries  in  Manufacturing  Account,  6 
Manufacturing  Account  Closed,  6,  7 
Manufacturing  Statement,  9  to  11 
Need  for  Perpetual  Inventory  Records,  11 

Assignment  24 — Factory  Accounting,  Perpetual  Inventory 
Perpetual  Inventory  Illustrated,  1 
Advantages  of  Perpetual  Inventory,  2 
Raw  Materials  in  Storeroom,  4  to  8 
Goods  in  Process,  8  to  18 
Finished  Goods  in  the  Stock  Room,  18  to  20 
Cost  Sheet,  12 
Distribution  of  Overhead,  15 

Assignment  25 — Classification  of  Accounts 

Summary  of  Classification  in  Books  and  Accounts,  1 

Personal  and  Impersonal  Accounts,  2 

Real  and  Nominal,  2 

Assets  and  Liabilities  Classified,  3 

Trading  Accounts  Classified,  4 

Manufacturing  Accounts,  4 

Expense  Accounts,  4,  5 

Variations  in  Classifications,  8 

Numbering  of  Accounts,  8  to  13 

Description  of  Accounts,  13  to  20 

Assignment  26 — Single  Entry  Bookkeeping 
A  Record  of  Personal  Transactions,  1,  2 
Single  Entry  Illustrated,  2  to  6 
Proof  of  Posting,  5 
Calculation  of  Net  Profit,  6,  7 

Net  Profit  and  Net  Increase  in  Capital  Distinguished,  7 
Various  Single  Entry  Systems,  8  to  10 
Single  Entry  Compared  with  Double  Entry,  10,  11 
Changing  to  Double  Entry,  11,  12 

Page  6 — Contents 


Assignment  27 — Accounting  for  Nontrading  Concerns 

Nontrading  Concerns  Sell  Services,  1 

Two  Kinds  of  Nontrading  Concerns,  2,  3 

Accounts  for  Lawyers,  3  to  8 

Concerns  not  Operating  for  Profit,  9 

Accounts  of  Golf  Club,  9  to  16 

Income  Statement  Different  from  Cash  Statement,  15 

Assignment  28 — Agencies,  Branches,  and  Consignments 

Branch  House  Accounting,  1  to  15 

Reconciliation  of  Head  Office  and  Branch  Office  Accounts,  8 

How  to  Prepare  a  Branch  Report,  11 

Adjustment  of  Head  Office  Books,  13  to  15 

Consignments,  15  to  23 

Consignor  and  Consignee,  16 

Account  Sales,  19,  20 

Balance  Sheets  of  Consignor  and  Consignee,  23 

Merchandise  Brokers,  23,  24 

Assignment  29 — Comparative  Statements 

Purpose  of  Statements,  1 

Analysis  of  Surplus,  3 

Application  of  Funds  Statement,  3,  4 

Directing  Future  Policies,  4,  5 

Practical  Uses  of  Comparative  Balance  Sheets,  8  to  10 

Comparative  Profit  and  Loss  Statement,  10,  11 

Comparative  Manufacturing  Statement,  11,  14 

Value  of  Comparisons,  15 

Cumulative  Profit  and  Loss  Statement,  18,  19 

Departmental  Statement,  20,  21 

Sales  Reports,  21  to  23 

Assignment  30 — Analysis  of  Financial  Statements 

Purpose  of  Analysis,  1 

Major  Factors  in  Analysis  of  Balance  Sheet,  2  to  6 

Static  Ratios,  6  to  1 1 

Velocity  Ratios,  11  to  17 

Practical  Uses  of  Ratios,  17 


Contents— Page  7 


WHAT  MEN  OF  PROMINENCE  THINK 

Each  assignment  contains  an  important  statement  to  the  accounting  profession 
from  some  well-known  accountant,  business  executive,  or  educational  leader.  These 
messages  are  worthy  of  careful  reflection.  They  are  opinions  that  have  been  thought 
thru  to  a  careful  conclusion.  They  are  the  essence  of  the  experience  of  the  following 
successful  men: 

Introduction  — Percy  H.  Johnston 

President,  Chemical  National  Bank,  New  York 

Assignment   2 — Elmer  E.  Brown,  Ph.  D. 

Former  U.  S.  Commissioner  of  Education 

Assignment   3 — Message  from  Forbes  Magazine 

Assignment   4 — Elmer  H.  Youngman 

Editor,  Banker's  Magazine 

Assignment   5 — F.  A.  Seiberling 

President,  Seiberling  Rubber  Company 

Assignment   6 — J.  Ogden  Armour 

President,  Armour  &  Company 

Assignment   7 — R.  E.  Connolly 

Treasurer,  Illinois  Central  Railroad  Company 

Assignment   8— A.  Von  Schlegell 

Vice  President,  Hupp  Motor  Car  Corporation 

Assignment   9 — W.  A.  Landerd 

Auditor  and  Credit  Manager,  The  Coca  Cola  Company 

Assignment  10 — E.  F.  Dahm 

Associate  Educational  Director,  LaSalle  Extension  University 

Assignment  11 — Woodrow  Wilson 

Assignment  12 — H.  Hough 

Comptroller,  The  B.  F.  Goodrich  Company 

Assignment  13 — Douglas  Wilson 

Chairman,  State  Board  of  Examiners  in  Accountancy,  Montana 

Assignment  14— H.  Cuthbert,  C.P.A. 

President,  Arizona  State  Board  of  Accountancy 
Page  8— Contents 


Assignment  15 — W.  S.  Carpenter 

Vice  President  and  Treasurer,  E.  I.  duPont  de  Nemours  &  Co. 

Assignment  16 — Hayes  Flowers,  C.P.A. 

Formerly  State  Auditor  and  Member  of  the  Tennessee  State  Board 
of  Certified  Public  Accountants 

Assignment  17 — Wm.  H.  Howe 

Auditor,  The  Diamond  Match  Company 

Assignment  18— Geo.  H.  Hess,  Jr. 

Comptroller,  Great  Northern  Railway  Company 

Assignment  19 — W.  S.  Carpenter 

Vice  President  and  Treasurer,  E.  I.  duPont  de  Nemours  &  Co. 

Assignment  20 — Wilbur  C.  Fisk,  C.  E. 

President,  Hudson  &  Manhattan  Railroad  of  N.  Y. 

Assignment  21 — Geo.  Wattley 

Treasurer,  United  States  Retail  Stores  Corporation 

Assignment  22 — ^James  Logan 

Chairman  of  the  Board  and  General  Manager  of  the  United  States 
Envelope  Company 

Assignment  23 — Irving  R.  Allen 

Vice  President  and  General  Manager  H.   W.  Kastor  &  Sons 
Advertising  Co. 

Assignment  24 — Charles  R.  Stevenson 

General  Manager,  National  Veneer  Products  Co. 

Assignment  25 — Walter  C.  Allen 

President,  Yale  &  Towne  Lock  Co. 

Assignment  26 — A.  R.  Erskine,  C.P.A. 

President,  Studebaker  Corporation 

Assignment  27 — J.  G.  Kissinger 

President,  Milwaukee  Association  of  Commerce 

; Assignment  28— W.  D.  Whitcomb,  C.P.A. 

Whitfield,  Whitcomb  &  Co.,  Portland,  Oregon 

Assignment  29 — N.  A.  Hawkins,  C.P.A. 

Hawkins,  Gies  &  Company,  Certified  Public  Accountants,  Detroit, 
Michigan 

Assignment  30— C.  M.  Lemperly 

Assistant  Manager,  Sherwin-Williams  Co.,  Cleveland,  Ohio 

Contents — Page  9 


KEY 

The  references  for  each  assignment  are  made  by  showing 
the  number  of  the  assignment  in  italic  type  followed  by  the 
page  numbers  in  such  assignment.  Thus  the  reference  6-17, 
18,  22  indicates  Assignment  6,  pages  17,  18,  and  22.  If  the 
subject  is  discussed  in  more  than  one  assignment,  the  various 
references  are  shown,  as  follows:  5-8,  9,  11;  14-2,  9.  The  sym- 
bol (0)  refers  to  the  introductory  folder;  T.  P.  to  the  title  page 
of  each  assignment. 


Page  10— Index 


GENERAL  INDEX 


Absorption 

Closing  Entries  by  Old  Cor- 
porations, 21-10,  11,  12 

Examples  of,  21-2 

Illustrative  Problems,  21-10, 
11,  12 

One  Form  of  Merger,  21-1 

Opening  Entries  by  Buying 
Corporation,  21-10,  12 

Abstracting  the  Ledger 
Illustrated,  15-10,  11 

Accepted  Draft 
Defined,  12-2 
Entries  for,  12-3 
Entry  by  Drawee   (Illustra- 
ted), 12-4: 

Entry  by  Drawer,  Two  Ways 

of  Recording,  12-3 
Illustrated,  12-3 
Routine  of  Transfer,  12-2 

Account 
See  Accounts 

Account  Sales 
Basis    for    Entries   by  Con- 
signor, 2S-22 
Contents  of,  28-19 
Illustrated,  2S-20 
Report  of  Consignee,  ^5-19 
When  Submitted,  ^5-19 

Accountancy 

Department  of  University,  0-9 
Higher  Accountancy  Course, 
0-8 

Accountants 
Adjust    Ledger    Periodically, 

16-2 
Advise  Business  Men,  17-1 
Aided  by  Articles  of  Agree- 
ment in  Partnership,  18-2 
Analyze  Business,  24.-I 
Approve  Vouchers,  22-4 
Are    Usually     Conservative, 

18-15 
Bank    Certificate    Used    By, 

13-S 
Change  Single  Entry  to  Dou- 
ble Entry,  26-2 
Classify  Accounts,  25-2 
Close  the  Ledger,  4-2 
Demand  for,  0-1;  r.P.-l,17 
Demand  for  Corporation,  ^0-1 
Design  Records,  10-6 


Determine  Classification  of 
Accounts,  ^5-12 

Differ  on  Classification  of 
Accounts,  25-S 

Duties  of,  0-1,  J-1;  16-2;  17-1; 
25-1;  30-1 

Duties  of  Cost  Accountant, 
24-11 

Examine  Financial  State- 
ments, 30-1 

Locate  and  Correct  Errors, 
15-2 

Make  Balance  Sheet,  1-3 
■  Make  Profit  and  Loss  State- 
ment, 2-1 

Prepare  Special  Statements 
for  Nontrading  Concerns, 
27-3 

Prepare  Statements  from  Sin- 
gle Entry,  26-2,  10 

Provide  Adequate  Records  for 
Nontrading  Concerns,  27-2 

Public  Accountant,  0-9;  6-1 

Qualifications  of,  0-8;  r.F.-12 

Reconcile  Bank  Balance,  13-9 

Should  Avoid  Untrue  State- 
ments, iO-14 

Should  Be  Familiar  with  Part- 
nership Organization,  18-1 

Should  Be  Familiar  With  Sin- 
gle Entry,  26-2 

Should  Study  Business  Con- 
ditions, iO-6 

Special  C.  P.  A.  Training, 
0-9,  10 

Verify  Cash  Balance,  13-13 

Verify  Closing  Entries,  6-1,  2 

Accounting 
Debit  and  Credit  System,  5-4 
For  Branch  Houses,  28-1 
For  Consignments,  28-Vo  to  23 
For  Corporations,  ^0-1,  2 
For  Partnerships,  18-1;  19-1 
Importance  to  Business,  0-1; 

1-2;  T.P. -26 
Important  Part  of  Executives 

Equipment,  T.P.-7,  8,  26 
Method  of  Controlling  Inven- 
tories, 24-I 
Origin   and   Development  of 

Accounting  Practice,  0-2 
Purpose  of,  0-1,  1-1;  2-1;  16-4 
Related  to  Business  Law,  0-9 
Terminology  Explained,  3-3 
Theory  and  Practice,  0-8 

Accounting  Information 
From  Purchase  Invoices,  8-2 
From  Sales  Invoices,  ^-8 


Accounting  Practice 
Basic  Principles  of,  0-8 
Importance    of   Principle    of 

Columnization,  iO-13 
Meets  the  Needs  of  Business, 

iO-13 
Modern,  0-8 
Relation  to  Purchase  Routine 

8-1 

Accounting  Principles 
Accruals,  Required,  16-5 
Adjustments,  Necessary,  17-12 
Auxiliary  Records,  Purpose  of, 

1,?-15 
Bad   Debts,    Provisions   for, 

17-10 
Balance   of   Every   Account, 

One  Fact,  ^5-13 
Bank  Reconciliation,  1,3-15 
Classification  of  Transactions, 

25-1 
Deferred  Items,  16-1,  5,  13 
Depreciation,  17-1 
Original  Entry,  Necessary,  5-9 
Record  of  Every  Transaction, 

5-9 

Accounting  Problems 
See  Typical  Problems 

Accounting  Records 
Auxiliary  Cash,  15-1 
Bill  Book  for  Notes,  11-19 
Cash  Book,  Primitive,  0-4 
Cash    Journal     (Illustrated), 

7-4,5 
Check  Register  (Illustrated), 

15-7 
Claim  Register,  14-13 
Consignment  Register,  14-13 
Day  Book,  Origin,  0-3 
Designing    Special    Journals, 

10-6 
Equipment  Record,  14-13 
Expansion  of,  8-13 
For  Branches,  28-1 
For  Clubs,  ^7-10 
For  Consignments,  28-16,  17 
For  Corporations,  ^0-2,  3 
For  Home  Office,  28-1 
For  Merchandise  Brokers,  28- 

23,  24 
For  Nontrading  Concerns,  ^7-2 
For  Professional  Firms,  ^7-3 
For  Trade  Acceptances,  12-8, 9 
Freight-In;  Freight-Out,  14-13 
General  Journal,  5-1,  3 
General  Ledger,  4-1,  18 
Merchandise  Records,  5-1,  16 

Index— Page  11 


Accounting  Records— Con't. 

Notebooks,  Memorandum 
Records,  11-22 

Notes  Payable  Book  (Illus- 
trated), 11-20,  21 

Notes  Receivable  (Book  (Illus- 
trated), 11-20,  21 

Petty  Cash  Book  (Illustrated), 
13-1,  2 

Plant  Property  Record,  i^-13 

Purchasejournal  (Illustrated), 
8-5 

Receiving  Records,  i^-ll 

Sales  Allowance  Book,  5-14 

Sales  Journal  (Illustrated), 
8-11,  16 

Sales  Returns  Book  (Illustra- 
ted), 8-U,  16 

Special  Books  for  Notes,  11-19 

Special  Journals,  5-1 

Storage  Record,  J^-IS 

Stores  Records,  H-S 

Voucher  Register,  1^-9 

Accounting  Systems 
Double  Entry,  3-7;  26-1 
Flexibility  of,  5-13 
Records    to    Meet    Business 

Needs,  5-14,  17 
Single  Entry,  26-1 

Accounts 
Account  Defined,  3-1 
Account   Rulings   Explained, 

Analysis  of  Accounts   (Illus- 
trated), 3-7 
Balancing,  Errors,  i5-l,  3 
Balances,  Debit  and  Credit, 

5-5 
Blank  Ledger,  5-12 
Branch  Office,  28-1,  4,  9 
Cash   Account    (Illustrated), 

S-A 
Classification  of  (Illustrated), 

25-Q,  8 
Classified  by  Letters,  25-9 
Classified  by  Numbers,  25-2>,  9 
Contents  of,  25-13,  20 
Debits  and  Credits  Defined, 

S-3 
Expense  Accounts,  2-5 
General  Expense,  25-5 
Group,  25-12 
Head  Office,  25,  1,  7,  11 
Importance  of  Titles  for,  25-12 
Income  Charges  and  Credits, 

25-5 
Increases  and  Decreases  in, 

5-4 
Manufacturing,  25-4 
Memorandum  Accounts,  25-9, 

11,  15,  18,  19 
Merchandise    Account,    Old, 

25-13 
Nominal  Accounts,  3-2;  25-2 
Numbering  System  (Illustrat- 
ed), 25-9,  10,  11 

Page  12 — Index 


Primary,  25-11 
Real  Accounts  Defined,  3-2 
Real  and  Nominal,  5-2;  25-2 
Reasons  for  Grouping,  25-7 
Selling    and    Administrative, 

25-4 
Skeleton  Form  of,  5-2 
Standard  Form  of,  5-2 
Uniform  Classification  of,  25-7 

Accounts  Payable  Ledger 
See  Creditors  Ledger 

Accounts  Receivable 
Bad  Debts  Losses,  17-10 
Basis  for  Ratios,  50-7, 8, 11, 12 
Controlling  Accounts  for,  25- 
14 

Accrued  Items 
Accrued  Asset,  Defined  and 

Illustrated,  J  6-5,  13 
Accrued  Interest  Payable,  16-5 
Accrued  Interest  Receivable, 

i6-4 
Accrued  Liability  Defined  and 

Illustrated,  i6-5,  13 
Accrued  Wages  Payable,  i6-4 
Adjustments  for,  16-1,  13 
Distinguished  from  Deferred 

Items,  i6-5 
Nature  of  Accruals,  Illustra- 
tions, 16-4 

Adjusted  Trial  Balance 
Working  Sheet,  16-8, 13;  17-12 

Adjustments 
Adjusted  Trial  Balance,  16-13 
Allowances.'Debtors  and  Cred- 
itors, 5-15,  16 
Adjusting  and  Closing  Entries, 

16-10 
Brought  into  Ledger,  16-14 
Effect  on  Statements,  16-11 
For  Accrued  Items,  16-1,  13; 

27-6 
For  Customers,  5-14,  15 
For  Deferred  Items,  16-1,  4,  5, 

7,  13 
For    Depreciation,    17-1,    3; 

?7-6 
For   Inventories   in   Closing, 

4-12,  13;  16-3 
For  Partners,  Profit  and  Loss, 

15-1 
For  Property  Values,  20-13 
For   Reconciling   Bank   Bal- 
ance, 15-12 
For   Uncollectible    Accounts, 

17-1;  27-6 
In  Partnerships,  15-1 
In  Reorganizations,  21-3,  4 
Journal   Entries    for,    16-10; 

27-6 
Made  Thru  Working  Sheet, 
16-8 


Of  Branch  Inventories,  25-14 

Of  Head  Office  Accounts, 
25-13 

Of  Inventories  in  Manufac- 
turing, 25-6 

On  Adjusted  Trial  Balance 
(Illustrated),  16-2 

Reversing  Entry  for,  16-7 

Administrative  Expenses 

Accounts  Under,  25-18 

Analyzed,  29-14 

Distinguished  from  Factory 
Expense,  25-4 

Executives'  and  Office  Sal- 
aries, 29-14 

Illustrated,  2-5 

Increases  Explained,  29-15 

Subdivision  of,  25-4,  19 

Advertising 

Account  for,  25-19 
Distinguished     from     Dona- 
tions, 25-19 

Agencies 

Business  Conducted  Thru, 
25-1 

Del  Credere  Agent  Defined, 
25-16 

Duties  and  Rights  of  Con- 
signee, 25-16 

Duties  and  Rights  of  Con- 
signor, 25-16 

Illustrations  of,  25-1 

Merchandise  Brokers,  25-23 

Allowance  for  Depreciation 
See  Reserve  for  Depreciation 

Analysis  of  Financial  State- 
ments 

Conditions  Fundamental  to 
Analysis,  50-1 

Major  Factors  in  Analyzing, 
50-2 

Purpose  of  Analysis,  50-1 

Static  Ratios,  50-6,  7 

Velocity  Ratios,  50-11,  12,  13 

Analysis  of  Ledger 
See  Abstracting  the  Ledger 

Application  of  Funds  State- 
ment 
How    Constructed    (Illustra- 
tion), 29-3,  4 
Purpose  of,  29-3 

Appraisal 
In  reorganizations,  21-2 

Articles  of  Agreement 
An  Aid  to  Accountant,  15-2 
Details  Specified  in,  15-2 
Partnership  Contract,  15-1 


Assets 
Accrued,  16-5,  13 
Classification  of,  25-3 
Current  Assets  Classified,  25- 

3,  13 
Current  Assets  Defined,  1-6; 

25-13 
Deferred    Assets    Classified, 

25-3  15 
Defined,  1-3;  25-13 
Depreciation  of,  17-2,  5,  7 
Fixed  Assets  Classified,  25-3, 

14,  15 
Fixed    Assets    Defined,    1-6; 

25-14 
Intangible   Assets  Classified, 

25-3;  50-10 
Life  of,  17-7 

Liquid,  Floating  or  Quick,  1-6 
Noncurrent,  30-9,  14 
Original  Cost  of,  17-7 
Overvaluation  of,  18-5 
Purchase  of,  17-9 
Retirement  of,  17-7,  9 
Sale  of  Old  Assets,  17-9 
Scrap  Value  of,  17-7 
When  Credited,  17-3 

Auditor 
Bank  Certificate  for,  15-8 
Duties  of,  1-14 
Examines    Journal    Entries, 

22-19 
Imprest  System  for,  15-3 
Verifies  Journal  Vouchers,  S2- 

19.20 

Auxiliary  Records 
Accounting    Significance    of, 

1^-1,  13 
Bank  Reconciliation,  15-13 
Capital  Stock  Ledger,  20-2 
Car  Record  Book,  1^-2,  3 
Cash  Over  and  Short  Book, 

15-14 
Cash  Register  Strip,  1^-7 
Check  Register,  15-7 
Check  Stubs,  15-6 
Claim  Register,  1^-13 
Clients   Ledger,  Nontrading, 

27-3 
Consignment  Register,  1^-13 
Corporation  Records,  20-2 
Dividend  Book,  20-2 
Equipment  Record,  14-13 
In-bills  Register,  14-13 
In-freight  Record,  1^-13 
Installment  Book,  20-2 
Insurance  Register  (Illustrat- 
ed), 14-2 
Inventory  Book  (Illustrated), 

14-5 
Minute  Book.  20-2 
Notes  Payable  Book   (Illus- 
trated), 11-20,  21,  22 
Notes  Receivable  Book   (Il- 
lustrated), 11-20,  21,  22 


Out-freight  Record,  14-13 
Payroll    Book    (Illustrated), 

14-4 
Petty  Cash  Book   (Illustrat- 
ed), 15-1,  20 
Plant  Property  Record,  14-13 
Related  to  Business  Papers, 

14-1 
Sales  Tickets  File,  14-7 
Special  Books  for  Notes,  11-19 
Stock  Certificate  Book,  20-2 
Stock    Ledger    Book    (Illus- 
trated), 20-6 
Stock  Transfer  Book   (Illus- 
trated), 20-8 
Storage  Record,  14-13 
Subscription  Ledger,  20-2 
Sundry  Auxiliary  Books,  14-1 
Trial    Balance    Book    (Illus- 
trated), 14-6 

Bad  Debts 
Adjustment  for,  17-10 
In  Various  Businesses,  17-11 
Reserve  for,  17-10,  11 

Balance  Sheet 

Account  Form  of,  1-6 

Accoimts,  4-4,  5 

Capital  Account  on,  1-6 

Classified,  Explained  (Illus- 
trated), 1-6;  5-12 

Comparative,  Explained  (Il- 
lustrated), 29-2;  6-8 

Contents  of,  2-12 

Deficit  on,  1-2 

Importance  to  Proprietor, 
1-12 

In  Accounting  Terms  (Illus- 
trated), 1-4 

In  Popular  Terms  (Illus- 
trated), 1-4 

Major  Factors  in  Analysis  of, 
50-2 

Notes  Receivable  Discounted 
on,  11-7 

Of  Consignee,  25-23 

Of  Consignor,  25-23 

Of  Head  Office,  25-8,  14 

Practical  Uses  of  Compara- 
tive, 29-8,  9 

Principle  of,  1-3 

Ratios,  Static,  50-6,  11 

Relation  to  Business  Control, 
1-12,  13,  14 

Relation  to  Profit  and  Loss 
Statement  (Illustrated),  S- 
11,  12 

Report  Form  of  (Illustrated), 
1-7,8 

Reserve  for  Depreciation  on, 
17-6, 11 

Reserve  for  Doubtful  Ac- 
counts on,  17-11 

Summary  Showing  Net 
Worth,  1-2 

Used  by  Auditors,  1-14 


Used    by    Government    Offi- 
cials, 1-14 
Used  by  Trade  Creditors,  1-13 
Used  in  Making  Loans,  1-12 
Used  in  Mergers,  1-13 

Bank  Certificate 
For  Auditors,  15-8 

Bank  Draft 
Defined,  12-1 

Form  of  Commercial  Paper, 
12-11,  12 

Bank  Pass  Book 
Balance  Reconciled,  15-8 
Purpose  of,  15-7 

Bank  Reconciliation  State- 
ment 
Analysis  of,  15-10 
Basis  for  Adjustments,  15-12 
Basis  for  Verification  of  Cash, 

15-13 
Clerical  Errors  on,  15-8 
Form  of  (Illustrated),  15-9, 11 
Main  Purpose  of,  15-8 

Bankruptcy 
Of  Partners,  19-2 
Of  Partnership,  19-2 

Banks 
Analysis  of  Balance  Sheet  by, 

1-12,  13;  50-4 
Auxiliary  Records  for,  14-8 
Credit  Department  of,  1-13 

Bank  Statements 
Canceled  Checks  with,  15-8 
Contents  of,  15-13 
General  Form  of,  15-8 
Monthly  Statements,  15-8 

Bills  of  Lading 
A  Contract,  14-12 
Advantage  to  Customer,  12-9 
Facilitate  Collections,  12-9 
Form  of  Business  Paper,  14-8 
Indorsed  by  Bank,  12-9 
Information  on,  14-13,  14 
Order  Form  of,  12-9 
Receipt  for  Goods,  14-12 
Received  by  Bank.  12-9 
Sent  by  Shipper,  12-9 
Sight  Draft  Attached,  12-9 
Signed  by  Shipper,  14-12 
Standard  Form,  14-12 

Bills  Payable 
See  Notes  Payable  Accoimt 

Bills  Receivable 
See  Notes  Receivable  Accovmt 
Index — Page  13 


Bookkeeper 

Accuracy  not  Sufficient,  16-1 

Duties  of,  i-1 

Fails  to  make  Adjustments, 
16-1 

Protected  by  Journal  Voucher, 
22-20 

Responsible  for  Journal  En- 
tries, 22-20 

Result  of  Error  by,  15-1 

Bookkeeping 
Double  Entry,  0-7;  3-7;  26-1 
Origin  of,  1-2 
Primitive  (Illustrated),  0-2 
Single  Entry,  26-1 

Books  of  Original  Entry 

Basis  for  Entries  in,  15-15 

Cash  Journal  (Illustrated), 
7-4,  5;  10-9,  11 

Check  Register  (Illustrated, 
13-7;  22-10 

Columnar  Cash  Book  (Illus- 
trated, iO-10,  11 

Columnar  Journal  (Illustrat- 
ed), 10-1,  3 

Columnar  Purchase  Book  (Il- 
lustrated, 10-S 

Columnar  Sales  Book  (Illus- 
trated), 10-7 

Errors  in  Making  Entries,  15- 
1,  7,  10,  15 

Evidence  in  Court,  15-12 

General  Journal  (Illustrated), 
5-3;  10-2 

Multicolumnar  Journal  (Illus- 
trated), 10-4 

Purchase  Journal  (Illustrated), 
8-5;  9-13 

Purchase  Returns  Journal, 
8-15 

Relation  to  General  Ledger, 
9-18 

Relation  to  Subsidiary  Led- 
gers, 9-18 

Sales  Allowance  Journal,  5-14 

Sales  Journal  (Illustrated), 
8-11;  9-4;  10-7 

Sales  Returns  Journal  (Illus- 
trated), 8-U,  16 

Subdivision  of  Journal  (Illus- 
trated), 9-1 

Voucher  Register  (Illustrated), 
22-8,  9 

Books  of  Record 
See  Auxiliary  Records 
See  Books  of  Original  Entry 
See  Journal  and  Ledger 

Borrowed  Capital 
Analysis   of   Balance    Sheet, 

30-5 
Calculation  of,  30-5 
Defined,  30-5 
Related  to  Security,  30-5 

Page  14— Index 


Branch  Account 

Head  Office  Investment,  28-7 
Purpose  of,  28-7 
Tie-up  with  Head  Office  Ac- 
count, ^5-8 

Branches 
Accounting  Procedure  for, 

28-1 
Chain  Stores,  28-1 
Closing  Entries  on  Books,  28-5 
Entries  on  Books  (Illustrat- 
ed), 28-3  to  6 
Goods  are  Charged  to,  28-2 
Head  Office  Account  of,  ^5-6 
Illustrative  Problems,  28-3  to 

15 
Insurance  Companies,  28-1 
Ledger  Accounts  (Illustrated), 

28-4,  10 
Railway  Stations,  28-1 
Relation  of  Records  to  Home 

Office,  28-1 
Report  to  Head  Office  (Illus- 
trated), 28-11,  12 
Two  Methods  of  Accounting 
for,  28-1 

Branch  House  Accounting 

Accounting  Procedure,  ^5-1 

Analysis  of  Branch  Invest- 
ment, 28-7,  8 

Chief  Problem  in,  28-2 

Controlled  thru  Periodic  Re- 
ports, 28-2 

Entries  on  Books  of  Branch, 
28-3,  6 

Entries  on  Books  of  Head 
Office,  28-6  to  8 

Goods  are  Charged  to  Branch, 
28-2 

Operation  of,  28-1 

Purpose  of  Branch  Account, 
28-7,  8 

System  Dictated  by  Home 
Office,  28-1 

Tie-up  with  Head  Office  Books, 
28-2,  8,  9 

Two  Methods  of,  28-1 

Use  of  Memorandum  Ac- 
counts, 28-7,  8,  11,  15 

Branch  Office  Books 

Accounts  of,  28-9 

Closing  Entries  (Illustrated), 
28-3,  5 

Entries  for  Branch  Transac- 
tions (Illustrated),  28-3,  4 

Head  Office  Account,  28-2,  3 

Ledger  Accounts  after  Posting 
(Illustrated),  28-3,  4 

Tie-up  Between  Head  Office 
and,  28-15 

Brokers 
See  Merchandise  Brokers 


Business 
Abnormal  Conditions,  59-10 
Accounting  Systems  Adapted 
to,  8-13;  10-1,13;  17-4;26-10 
Advantage  of  Corporate  Or- 
ganization, 20-2 
Advantage  of  Partnership  Or- 
ganization, 18-3 
Advantages  of  Merger,  i-13, 14 
Advantages  of  Trade  Accept- 
ances, 12-7 
Analysis  by  Ratios,  50-6 
Analysis  of  Business  Transac- 
tions, 5-8;  14-13,  15;  15-1 
Bad  Debts  in  Various  Busi- 
nesses, i7-ll 
Bankers'     Requirements     for 

Loans,  1-12,  13 
Basis  for  Granting  Credit,  i-13 
Collection     Activity     Deter- 
mined, 50-12 
Collections  Aided  by  Drafts, 

12-1 
Columnar  Books  Provide  In- 
formation for,  iO-13 
Conducted    Thru    Agencies, 

28-1 
Conservative  Program,  50-17 
Control  Thru  Analysis  of  Bal- 
ance Sheet,  1-12 
Corporate  Form  of,  20-1 
Corporations  Compared  with 

Partnerships,  20-2 
Credit  Standing  of  Customer, 

5-9 
Dependent  on  Accounting,  0-1, 

T.P.-27 
Directing  Future  Policies,  29- 

4,5 
Discount  Policies,  59-15 
Expansion  and  Growth,  29-5 
Extractive  Industries,  50-10 
Financing  a  Corporation,  29- 

5,6 
Fire  Loss  Covered  by  Insur- 
ance, 17-3 
Growth  of  Corporations,  50-1 
Importance    of    Articles    of 

Agreement,  18-1,  2 
Inadequate     and     Expensive 

Methods  in,  2^-2 
Increase  of  Sales  in,  29-5 
Information  for  Manufactur- 
ers, 23-9 
Investigations  on  Losses,  I'- 
ll 
Liquidation    of    Inventories, 

59-10 
Losses  from  Bad  Debts,  17-11 
Maximum  Production,  59-5 
Method  of  Selling  on  Consign- 
ment, 55-16 
Methods   of   Safeguarding 

Cash,  7-1 
Modem    Executive's    Equip- 
ment, T.P.-7;  «9-19 


Business — Continued 

Most  Business  Done  on  Credit 
Basis,  i-14;  9-2 

Papers,  1^-8 

Plans  for  Purchasing,  50-13 

Policies  Based  on  Information, 
iO-13;  26-10 

Preventing  Overstock  Condi- 
tions, 50-12 

Profitableness  of  Investment, 
50-14 

Pulse  of,  50-7 

Purchase  of  New  Equipment, 
50-15,  16 

Records  for  Small  Business, 
20-1,  5;  26-1,  10 

Relation  of  Promissory  Notes 
to,  11-1 

Sale  of  Business,  17-3 

Scientific  Basis  of,  T.P.-27 

Single  Entry  Inadequate  for, 
26-11 
,     Statement  of  Working  Capi- 
tal (Illustrated),  ^9-5 

Study  of  Statistics,  50-1 

Three  Types  of  Business,  18-1; 
20-2 

Tying  up  of  Funds  in,  50-10, 
12 

Typical  Cases  in,  iO-5,  6 

Use  of  Bills  of  Lading  in,  12-^ 

Business  Papers 
Bank  Checks,  ii-8 
Bills  of  Lading,  i4-8 
Collect  Data  for  Record,  i-4-8 
Credit  Memorandums,  1-4-8 
Debit  Memorandum  or  Jour- 
nal Bills,  J -4-8 
Defined,  i.4-8 
How    Forms  Are    Designed, 

l]^-S 
Notes  and  Drafts,  i4-8 
Purchase  Invoices,  i.4-8 
Sales  Invoices,  lU-^ 
Statements  of  Account,  ll^-% 
Typical  Problem  on,  74-15 
Various  Kinds  of,  i4-8 

Capital 

Borrowed,  50-2,  5 

Defined,  25-16 

Fixed,  50-2,  3 

Formula  for  Increase  in,  26-8 

In  Corporations,  25A 

In  Nontrading  Concerns,  27-3 

In  Partnerships,  25-4 

In  Single  Proprietorship,  25-4 

Net  Increase  in,  26-7,  8 

Owned.  50-4,  8,  9,  13 

Working  Capital,  29-5;  50-4 

Capital  Account 
Account  Closed  and  Balanced, 

4-11 
Credit  Balance  of,  5-5,  14 
Direct  Entries  in,  4-15 


In  Corporations,  25-4 
In  Partnership,  IS-l;  25-4 
In  Single  Proprietorship,  1-6; 

25-4 
Net  Profit  Brought  into,  4-1. 

2,  6.  10.  16 
Proprietors'     Capital     (Illus- 
trated), 5-7 

Capital  Expenditures 
Discount  on,  22-14,  24 
Distinguished  from  Operating 

Expenses,  2-5 

Capital  Profit  and  Loss 
Caused  by  Shortage  in  Cash, 

13-15 
Distributed     between    Part- 
ners, i9-12 
Sale  of  Fixed  Assets,   17-S 
Sale  of  Partnership,  i9-12 

Capital  Stock 

Account,  20-3 

Authorized,  20-4;  21-10 

Cancellation  of  Old  Stock, 
21-7 

Certificate  (Illustrated),  20-7 

Common,  20-10 

Cumulative   Preferred,    20-10 

Distribution  in  Consolida- 
tions, 21-7 

Entries  for  Issue  of,  20-3,  4,  5 

Exchanged  for  Bonds  in  Mer- 
ger, 2i-ll 

How  Shown  on  Balance  Sheet, 
20-10 

Kinds  of,  20-9,  16 

Non-cumulative,  20-10 

No  par- value,  20-9 

Not  a  Liability,  20-11 

Par-value,  20-9 

Preferred,  20-10 

Separate  Accounts  for,  20-10; 
21-10 

Subscriptions  for,  20-3 

Treasury  Stock,  20-3,  10,  11 

Unissued,  20-4;  2i -10 

Capital  Stock  Account 
Contributions  of  Stockholders, 

20-12;  25-16 
Entries,  in,  20-3,  4,  5 
Not  a  Liability,  20-11 
Part  of  Corporate  Net  Worth, 

20-12;  25-16 
Peculiar  to  Corporations,  20-3 
Remains  Unchanged,  20-12 
Subdivision  of,  25-16 
Transfers  of  Stock,  20-8 

Capital  Stock  Discount 
Defined,  20-14 
Entry  for,  20-14 
Legal  Requirements  on,  20-14 


Capital  Stock  Ledger 
A  Subsidiary  Ledger,  20-5,  6 
Controlled  by  Capital  Stock 

Account,  20-6 
Illustrated,  20-6 
In  Loose-leaf  Form,  20-5 
Used  in  Corporautios,  20-2 

Capital  Stock  Premium 

Advantage  of  Selling  at  Pre- 
mium 

Credited  to  Capital  Surplus, 
20-14 

Defined,  20-14 

Entry  for  (Illustrated),  20-14 

Capital  Stock  Subscribed  Ac- 
count 
Purpose  of,  20-4 
Used  in  Corporations,  20-3 

Capital  Surplus 
Credited  for  Land  Donated, 

20-13 
Credited  with  Appreciation  of 

Assets,  20-13 
Credited  with  Donated  Stock, 

20-10,  13 
Credited   with   Premium   on 

Stock  Sales,  20-14 
Distinguished    from    Regular 

Surplus,  20-13 
Purpose  of,  20-13 

Car  Record  Bock 
Columns  Used  in,  14-3 
Cross  Reference  with  Invoices, 

14-3 
Form,  14-2,  3 
Purpose  of,  14-2 

Cartage  in 

Distinguished    from    Cartage 

Outward,  25-18 
Entries  in,  25-18 
Included  with  Freight  in,  25 
18 

Cash 

Balance  not  Net  Income,  27- 
16 

Cash  Balance  Verified,  IS- 
IS, 14 

Disbursements  Distinguished 
from  Expenses,  27-15 

In  Petty  Cash  Fund,  15-1;  25- 
14 

Imprest  System  for,  15-2 

More  than  Currency,  12-10 

Over  and  Short,  15-14 

Receipts  Distinguished  from 
Income,  27-14 

Reconciliation  with  Income 
(Illustrated),  27-13 

Sep)arate  Accounts  for,  25-13 

Index— Page  15 


Cash  Account 
Balance  Sheet  Account,  ^-5 
Cash    Account    Used    with 

Cash  Journal,  7-7 
Debits  and  Credits  in,  5-4,  5, 

14 
For  Cash  in  Bank,  25-13,  14 
For  Cash  in  Office,  25-14 
Has  Debit  Balance,  5-5,  14 
Illustrated,  5-4;  ^-2 
Increased  on  Left  Side,  5-7 

Cash  Book 

See  Cash  Journal 
Cash  Discounts 
Journal  Entries  for,  10-13 
Method  of  Handling,  10-13 
Record  of  Purchase  Discounts, 

10-6 
Record   of   Sales    Discounts, 
10-6 

Cash  Journal 

Advantages  of,  7-1 

Advantages   of  Special  Col- 
umns in,  10-13 

Columns  for  Sales  and  Pur- 
chases, 10-6 

Defined,  7-1 

Developed    from    Columnar 
Journal,  10-5 

Discounts  in,  10-13 

Divided    for    Receipts    and 
Disbursements,  7-7,  9 

Form  (Illustrated),  7-4 

Helps  to  Safeguard  Cash,  7-1 

Handling  Purchase  Discounts, 
iO-6 

Handling     Sales     Discoimts, 
10-6 

In  Nontrading  Concerns,  27-3 

Making  Red  Ink  Entry,  11-13 

Not    Used    in    Pure    Single 
Entry,  26-2 

Objections  to  Handling  Dis- 
counts in,  10-13 

Posting  of,  7-6,  9 

Provides  Cash  Balance  Quick- 
ly, 7-1 

Purpose  of  Folio  Column,  7-6 

Reasons    for    Having    Cash 
Account  with,  7-7 

Saves  Time  in  Posting,  7-1, 
6.8 

Single  Entry  Cash  Book  (Illus- 
trated), 26-9 

Special    Column    for    Each 
Bank,  10-6 

Subdivision  of  Clerical  Work, 
7-1 

With  Single   Entry  System, 
26-8 

Cash  Over  and  Short  Account 
A  Nominal  Account,  15-14 
Closed  into  Profit  and  Loss, 
15-15 

Page  16 — Index 


Credit  Balance  a  Gain,  15-15 
Debit  Balance  a  Loss,  15-15 

Cash  Purchases 
Methods  of  Handling,  5-7 

Cash  Register  Strip 

Cash  from  Customers  Posted, 
1^-7 

Cash  from  Customers  Regis- 
tered Separate,  1^-7 

Totals  Used  in  Posting,  14-7, 
14 

Cash  Sales 

Entered  in  Sales  Journal,  5-13; 

10-6 
Handled  Thru  Cash  Book,  5-9 
Need  for  Knowing,  10-13 
Record  in  Journal  Criticized, 

5-9,  10 

Certificate  of  Protest 
Form  and  Purpose  of,  11-8 

Check  Register 
Details  Entered  m,  15-6 
Entries  Made  in,  22-10 
Illustrated,  22-10 
Principal  Value  of,  15-7 
Totaling  and  Posting,  22-15 
Use  in  a  Large  Business,  15-7 

Checks 
Canceled  Checks,  15-8 
Cashiers'  (Illustrated),  12-10 
Cash  Received  for,  15-5 
Certified  Check  (Illustrated), 

12-10 
Compared  to  Drafts,  12-10 
Entered  in   Check   Register, 

15-7 
Exchanged  for  Currency,  15-5 
Form  of  Business  Paper,  14-8 
Form  of  Commercial  Paper, 

12-10,  12 
Information  on  Stubs  of,  15-6 
Method  of  Numbering,  15-7 
Reconciling  Uncashed,  15-9 
Travelers',  12-11 
Used  in  Pad  Form,  15-6,  7 

Classification 
Aid  to  Accountant,  25-2 
By  Perpetual  Inventory  Sys- 
tem, 24-1;  25-1 
Chief  Purpose  of,  25-1,  2 
Eight  Uses  in  Accounting,  25-1 
Fundamental  Principle  in  Ac- 
counting, 25-1 
In    Accounting    Statements, 

1-6;  2-2;  25-1 
In   Auxiliary  Records,   15-1; 

14-1;  25-1 
In  Special  Journals,  7-1;  5-1; 
25-1 


In  Voucher  Register,  22-8,  9; 

25-1  I 

In  Working  Sheet,  16-8;  25-1  •! 
Of  Assets.  25-3 
Of  Ledger.  9-1;  25-1 
Of  Liabilities,  25-3 
Of  Manufacturing  Expenses,! 

25-1  I 

Of   Transactions   in   Ledger,! 

5-1;  25-1,  2 

Classification  of  Accounts 
Aid  in  Preparing  Statements, 

25-7 
Aid  in  Distinguishing  Capital 

and  Revenue,  25-7 
Alphabetical,  25-9 
By  Primary  Numbers,  2 '-11 
Examples  of  Uniform,  25-7 
For  a  Golf  Club  (Illustrated), 

27-9,  10 
For  a  Growing  Business,  25-7 
For     Lawyers     (Illustrated), 

27-3.  4 
For  Mercantile  Business  (Il- 
lustrated), 25-9,  10,  11 
For  Printing  Concerns,  25-7 
Group     Accounts     Not     in 

Ledger,  25-12 
Illustrated,  25-6 
Importance  of  Account  Titles, 

25-12,  13 
In  Primitive  Double  Entry, 

25-2 
Losses  From  Bad  Debts  in, 

25-8 
On  Balance  Sheet,  25-1 
On  Working  Sheet,  25-1 
Personal  and  Impersonal,  25-2 
Purchase  and  Sales  Discounts 

in,  25-8 
Purpose  of,  25-2,  7 

Real  and  Nominal,  25-2 
Recommended    by    Govern- 
ment, 25-9 
Secures    Business    Statistics, 

25-2 
Taxes  and  Insurance  in,  25-8 
Use  of  Numbers  in,  25-8,  9 
Uniform,  25-7 
Varies  with  Business  Needs, 

25-8 
Various  Methods  of,  25-2 

Closing  the  Ledger 
Accounting  Reasons  for,  4-2 
Accounts  to  be  Closed,  4-5 
Advantages  of  Journal  Entry 

Method.  6-1 
Capital    Account    Balanced, 

4-11 
Closing  an  Accoimt,  4-5 
Closing   by   Journal   Entries 

(Illustrated),  6-4 
Closing  Entries  Posted  (Illus- 
trated), 6-5,  6,  7 


Closing  THE  Ledger— Con't, 

Closing  Process  Defined  (Illu  s 

trated),  4-1,  2,  3,  4 
Directly  to  Profit  and  Loss, 

Objections,  4-15 
Inventory    Adjustments    in, 

4-7,  8;  6-3 
Need  for  Rechecking  Closing 

Entries,  6-7 
Of  Branches  (Illustrated),  28-5 
Of  ConsigTiee,  ^5-19 
Of    Consignor    (Illustrated), 

28-22 
Of  Head  Office  (Illustrated), 

28-7,  13,  14 
Purpose  of  Trading  Account 

in,  4-6 
Purpose  of  Profit  and  Loss 

Account  in,  4-7 
Time    for    Making    Closing 

Entries,  4-2;  6-5 
Use  of  Sunmiary  Accounts  in, 

4-6 
Various  Methods  of  Closing, 

4-12,  13, 14 

Club  Accounts 
Classification  of  Accovmts  for 

27-9, 10 
Handling    Depreciation    and 

Replacements,  27-11 
Illustration     of    Nontrading 

Concern,  27-1 
Special  Records  for,  27-10 
Statements  Rendered  for,  27- 

12  to  15 
Use  of  Revenue  Account,  27- 

11 

Collections 
Activity  Determined,  30-12 
Estimating    Loss    from    Bad 
Debts,  i7-ll 

Columnar  Cash  Book  or  Jour- 
nal 
Advantages  of,  lG-13 
Controlling    Accounts    Used, 

10-1 
Entries  in,  10-11 
Illustrated.  10-9,  10, 11 
Posting  of  (lUustrated),  10-12 
Ruling  and  Balancing,  iO-12 

Columnar  Journal 

Posting  Totals  from,  10-2 
Special    Journals    Outgrowth 

of,  10-5 
When  Postings  Are  Made,  10-2 

Columnar  Purchase  Book  or 

Journal 
Illustrated,  10-8 
Purpose  of  Due  Date  Column 

in,  10-8 
With  Department   Columns, 

10-8 


Columnar  Sales  Book 
Additional  Coltmins  in,  10-6 
Illustrated,  10-7 

COLUMNIZATION 

Additional  Columns  in  Cash 

Journal,  9-5,  14 
Colmnnar  Journal,  10-1 
How  Applied  in  Various  Situ- 
ations, 10-5,  6 
Principle  of,  10-1,  6 
Two  Purposes  Served,  10-6 

Commercial  Draft 
Defined,  12-1 
Illustrated,  12-2 
Payable  to  Self  (Illustrated), 
12-7 

Commercial  Paper 
Bank  Check  (Illustrated),  12-9 
Bank  Draft  (Illustrated),  12- 

11 
Cashiers  Check  (Illustrated), 

12-10 
Certified  Check,  12-10 
Express  Money  Orders,  12-11 
Parties  to  Check,  12-9 
Postal  Money  Orders,  12-11 
Similar  to  Sight  Draft,  12-10 
Travelers'  Checks,  12-11 
Various  Kinds  of,  12-9,  12 

Common  Capital  Stock 
Distinguished  from  Preferred, 

20-10 
Separate  Record  for,  20-10 
When  More  Desirable  than 

Preferred,  20-10 

Comparative  Balance  Sheet 
Illustrated,  29-2 
Practical  Uses  of,  29-8,  9 
Preparation  of,  29-6,  7,  8 
Used  by  Banks,  29-9 
Used  by  Managers,  29-8 
Used  by  Stockholders,  29-9 
Used  with  Other  Statements, 
29-4 

Comparative  Manufacturing 
Statement 
Illustrated,  29-13 
With  Cost  of  Sales  Statement, 
29-13 

Comparative  Profit  and  Loss 
Statement 

Basis  of  Comparison  in,  29-11 

Formula  for  Calculating  Per- 
centages, 29-11 

Periods  Covered,  29-10 

Purpose  of,  29-10 

Showing  Detailed  Percent- 
ages, 29-15 


Svunmary  of  Increases  in,  29- 

17 
Use  of  Percentages  in,  29-10, 

11 

Comparative  Statements 

Basis  for  Future  Estimates, 
29-23 

Give  Information  to  Manage- 
ment, 29-1 

Purpose  of,  29-1,  4 

Uniform  Classification  of 
Items  in,  50-2 

Used  by  Directors  and  Offi- 
cers, 29-1 

Used  with  Graphic  Charts, 
29-1 

Uses  of  Information  in,  29-23 

Various  Kinds  of,  29-1 

Consignee 
Closing  Entries  on  Books  of, 

28-22 
Definition  of,  2S-16 
Entries  on  Books  of,  25-18 
Financial  Statements  of,  28-23 
Meaning  of  Del  Credere 

Agent,  25-16 
Report  to  Consignor  of,  25-19 
Rights  and  Duties  of,  25-16 
Title  of  Consigned  Merchan- 
dise, 25-16 

Consignment  Register 
Auxiliary  Record,  14-13 

Consignments 
Account   Sales    (Illustrated), 

25-20 
Advantages  of,  25-16 
Consignee's  Books,  25-18 
Consignor's  Books,  25-19 
Consignor's  Inventory,  25-23 
Definition  of,  25-16 
Del  Credere  Agency,  25-16 
Expenses  of,  25-22 
Legal  Status  of,  25-16 
Main    Accoimting    Problems 

in,  25-16 
Method  of  Selling  on,  25-16 
Sales    of    Goods    on    (Illus- 
trated), 25-17 
Separation  from  Other  Goods, 

25-16 
Title  to  Goods  on,  25-16 

Consignor 
Closing  Entries  on  Books  of, 

25-22 
Definition  of,  25-16 
Entries  on  Books  of,  25-19 
Financial  Statements  of,  25-23 
Report    from   Consignee   to, 

25-20 
Rights  and  Duties  of,  25-16 

Index— Page  17 


Consolidations 

Entries    on    Books    of    New 

Corporation,  21-2>,  9,  10 
Entries  on  Books  of  Old  Cor- 

portation,  21-&,  1,  8 
Examples  of  (Illustrated),  21- 

1,  5,  10 
Of  Partnerships,  i.9-8 


Contingent  Liability 
Assumed  by  Maker  of  Draft, 

12  A 
Defined,  ii-5 
Entry  Showing,  11-& 
Indorsement  in  Blank  Creates, 

11-Q 
Notes  Receivable  Discounted 

Account  Shows,  11-1 
When  Real   Liability  Arises, 

Ii-8;  12-e> 
When  Taken  from  the  Books, 

1^-5,  6;  ^5-14 


Contracts 
Articles  of  Agreement,  lS-\ 
Partnership  Based  on,  18-\ 
Simplify    Accounting    Prob- 
lems, 18-2 
Written  and  Oral  Compared, 
18-\ 

Controlling  Accounts 
Advantages  of.  9-19 
Aid  in  Locating  Errors,  9-19 
Capital  Stock  Account,  9-19, 

20-Q 
Definition  of.  9-18 
Enables  a  Division  of  Labor, 

9-19 
Examples  of,  9-19 
For  Accounts  Payable,  9-3 
For  Accounts  Receivable,  9-3; 

^5-14 
For  Detail  Expense  Accounts, 

9-2 
For     Detail     Material     Ac- 
counts, 9-12,  19 
Finished  Goods  Account,  ^4-3 
Goods    in    Process    Account, 

21t-2 
For  Investment  Accounts,  9- 

19 
Notes  Payable  Account,  9-19 
Notes    Receivable    Account, 

9-19 
Prevention  of  Errors  by,  15-13 
Provide  Internal  Check,  9-18 
Purpose  of,  9-18 
Raw  Materials  Account,  ^i-3,6 
Representative  Accounts,  9-17 
Subdivision  of  the  ledger,  9-1 
Subscriber's  Account,  20-5 
Trial  Balance  Reduced  thru, 

9-19 

Page  18 — Index 


Corporation 
Accounts  Peculiar  to,  20-Z,  16 
Advantages  of  Corporate  Or- 
ganization, 20-2 
Books  and  Records  of,  20-2 
Capital  Stock  with  Par  Value, 

19-13 
Considered  as  an  Individual, 

20-1 
Control  of,  20-2 
Definition  of,  20-\ 
Developed    from    Proprietor- 
ships, 20-\ 
Formation  of,  19-13;  20-\ 
Governed  by  Laws  of  State, 

20-\,  15 
Liability  of  Stockholders,  20-2 
Opening    Entries    of,    i9-13; 

20-2 
Permanent  Existence  of,  20-2 
Provision  for  Working  Capi- 
tal, 20-l\ 
Procedure  for  Mergers,  20-15 
Receives  Charter  from  State, 

20-1 
Recent  Developments,  20-1 
Reorganization  of,  20-15 
Special  Accoimting  Books  for, 

20-5,  16 
Steps  in  Organization  of,  20-1, 

3 
Transfer  of  Stock,  20-2 

Corporation  Accounts 
Capital  Stock,  20-3,  11 
Capital  Stock  Subscribed,  20-3 
Compared  with  General  Ac- 
counting, 20-1 
Dividends,  20-3,  13 
Joint  Stock  Companies,  i9-17 
Premium  on  Capital   Stock, 

20-3 
Subscriptions  to  Stock,  20-3 
Surplus,  20-3,  12 
Treasury  Stock,  20-3 

Corporation  Balance  Sheet 
Appropriated  Surplus  in,  20-15 
Compared  with  Regular  Bal- 
ance Sheet,  20-15 
Free  Surplus  in,  20-15 
Net  Worth  Section  in  (Illus- 
trated), 20-15 
Reserves  in,  20-15 

Corporation  Books 
Capital  Stock  Ledger,   20-2, 

5,  6 
Distinguished    from    General 

Books,  20-12 
Dividend  Book,  20-2,  9 
Installment  Book,  20-2,  5 
Minute  Book,  20-2,  8 
Stock  Certificate  Book,  20-2, 

6 
Stock  Transfer  Book,  20-2,  6, 

7 
Subscription  Ledger,  20-2,  5 


Corporation  Profit  and  Loss 
Statement 
Additional  Items  in,  20-15 
Compared  with  Regular  Profit 
and  Loss  Statement,  20-15 

Corporation  Statements 
Current,  20-14,  15 
Monthly,  20-14 
Purpose  of,  20-14 
Two  Kinds  of,  20-14 

Corrections 

Method  of  Making,  15-11 
Where  to  Begin  in  Making, 
15-12 

Cost  Accountant 

Determines  Unit  Cost,  24-17 
Makes  up  Cost  Sheet,  24-11 

Cost  Accounting 
An  Exact  Science,  25-1 
Direct  Labor  Charges  on  Cost 

Sheet.  24-13 
Helps  to  Solve  Problems  of 

Production,  25-1 

Cost  Department 

Duties  of,  24-9 

Entries  from  Material  Requi- 
sitions, 24-8 

Files  Time  Reports,  24-14 

Function  of,  21^-9,  10 

Requisitions  Compared.  24-9 

Summarizes  Direct  Labor. 
24-13 

Verifies  Final  Payroll,  24-14 

Cost  Ledger 

Contains  Accounts  for  Pro- 
duction Orders,  24-11 

Controlled  by  Goods  in  Pro- 
cess Account,  24-3,  11,  17 

How  Related  to  Goods  in 
Process  Account,  24-17 

Cost  of  Goods  Sold 

Account  for,  24-3 

Analysis  of  Increase  of,  29-14, 
15 

Closed  into  Trading,  24-19 

Comparative  Statement  for, 
29-13 

How  Determined,  2-4 

Part  of  Profit  and  Loss  State- 
ment, 2-4 

Standardized,  29-15 

Cost  of  Production 

Carried  into  Trading  Account, 

25-7 
Determined  in  Manufacturing 

Account,  23-2 
Direct  Labor  in,  25-3 
Direct  Material  in,  25-2 
Elements  of,  25-2 


Cost  of  Production— Con't. 

Elements    of   Factory    Costs 

(Illustrated),  23-i 
Factory  Expense  in,  23-3,  4 
Formulas  for,  25-4 
Indirect  Labor  in,  23-3 
Indirect  Material  in,  23-2 
On  Profit  and  Loss  Statement, 

23-9,  10 
Prime  Cost,  23-A 
Takes    Place    of    Purchases, 

23-10 

Cost  Sheet 
Charged  with  Material  Used, 

n-11 
Direct   Labor   Recorded   on, 

2^-11,  13 
For  Each  Production  Order, 

2J^-n 
Illustrated,  24-12 
Loose   Leaf   Sheets   in   Cost 

Ledger,  2^-11 
Made  up  by  Cost  Accountant, 

24-11 
Overhead  Recorded  on,  2^-15 
■   Unit  Cost  on,  21^-17 
What  is  Entered  on,  2U-\\ 
When    Taken    Out   of   Cost 

Ledger,  2^-17 

Credit  Analysis 

Bank  Department,  i-13 
Depreciation  to  be  Considered, 

17-1 
Progress  of,  17-1 
Trading  Concerns,  i-13;  8-9; 
17-1 

Credit  Memorandums 
Basis  for  Entries,  lI^-\2 
Form  (Illustrated),  S-15 
Given    to    Customers,    S-15; 

1^-12,  14 
Purpose  of,  S-14 
Received  from  Creditors,  Ur 

12 
Two  Types  of,  S-15 
Used  as  Sales  Returns  Book, 

8-16 

Creditors  Ledger 

Controlled  by  Accounts  Pay- 
able, 9-17 

Developed  by  Journal  Entry, 
9-11 

Form  of  Purchase  Journal 
Used  with.  9-13 

Illustrated,  9-16 

Postings  to  (Illustrated),  9-13, 
14 

Statistical  Value  of,  9-17 

Credit  Standing 

Collections  When  Standing  Is 

Poor,  12-9 
Extension  of,  17 -\ 


Impairment  of,  12-1 

Trade  Acceptances  a  Factor, 

i2-8 
With  Bank,  12-7 

Cross  Indexing 
Importance  of,  5-9 
Necessary  in  Posting,  5-9 

Cumulative  Profit  and  Loss 
Statement 
Defined,  29-18 
How  Used,  29-18 
Illustrated,  29-18 

Current  Accounts 
With  Consignor,  2S-18 

Current  Assets 
Compared  with  Current  Lia- 
bilities, i-12,  13;  50-6,  7 
Defined,  i-6 
Detail  Accounts,  25-3 
One  Class  of  Assets,  25-3 
Termed   Liquid,   Floating  or 
Quick,  1-6 

Current  Liabilities 
Compared  with  Current  As- 
sets, 1-12,  13 
Defined,  1-7;  25-15 
Detail  Accounts,  25-3 
Distinguished  from  Fixed,  1-7 
One  Class  of  Liabilities,  25-3 

Customers  Ledger 
Controlled  by  Accounts  Re- 
ceivable, 9-17 
Illustrated,  9-10 
Set  Up  by  journal  Entry,  9-3 
Statistical  Value  of,  9-17 

Day  Book 

Definition  of,  0-3,  4 
Form  and  Purpose  of,  0-3 

Debit  and  Credit 
Accounts  with  Credit  Balance, 

5-5 
Accounts  with  Debit  Balance, 

5-5 
Analysis  of  Postings,  15-10 
Classification  in  Columns,  10-1 
Convenience  of  System  of,  5-3 
Meaning  of,  0-7,  5-3 
Primitive  Application,  0-6 

Debit  Memorandums 
Form  of  Business  Paper,  l-J-8 
For  Sales  of  Equipment,  lJf-9, 

14 
Used  for  Returned  Material, 

14-9,  14 

Deferred  Charges 
Definition  of,  16-5,  6 
Detail  Accounts,  25-3 


Illustrated,  16-5,  6 
Represent  Assets,  25-3 
Two   Methods  of  Handling, 
16-7.  8 

Deferred  Credits 
Definition  of,  16-7 
Shown  on  Balance  Sheet,  16-7 

Deferred  Items 
Adjustments    Necessary    for, 

16-1.  5.  13 
Carried  into  Next  Period,  16-5 
Deferred  Assets,  16-6,  7 
Deferred  Charges,  16-12,  13 
Deferred  Credits,  16-7,  13 
Deferred  Income  from  Rent, 

16-6 
Deferred  Liability,  16-7 
Distinguished   from   Accrued 

Items,  16-15 
Illustrations,  16-5 
Nature  of,  16-8 
Ofifice  Supplies,  16-6 
Prepaid  Insurance,  16-6 
Prepaid  Rent.  16-5 
Reversing  Entry  for,  16-7 
Two   Methods   of  Handling, 

16-7 


Deficit 
Adjusted    in 

21-8 
Defined,  1-2 


Consolidation, 


Del  Credere  Agency 
Meaning  of  Term,  2S-16 

Delivery  Expense 
Examples  of,  25-19 
When  Debited,  25-19 

Demand  Note 
Compared  with  Sight  Draft. 

12-1 
Explanation  of,  11-3 

Departmental  Profit  and 
Loss  Statement 
Illustrated.  29-20 
Purpose  of,  29-21 

Deposits  in  Transit 
Reconciliation  for,  15-9 

Depreciation 

An  Estimated  Shrinkage,  17-2, 
12 

An  Operating  Expense,  17-1 

Chief  Causes  of,  17-2 

Closed  into  Profit  and  Loss, 
17-4 

Credited  to  a  Reserve  Ac- 
count, 17-4,  12 

Debits  and  Credits  for,  17-2 

Deduction  for  Federal  Income 
Tax,  17-1 

Index— Page  19 


Depreciation— Continued 
Distinguished  from  Renewals, 

17-9 
Distinguished   from   Repairs, 

Distinguished  from  Replace- 
ments, 17-9 
Distributed     over     Life     of 

Asset,  17-2 
Factors  in  Rate  of,  17-7 
For  Club  Accounts,  27-11 
Functional  Depreciation,  17-2 
May    Be   a    Manufacturing 

Expense,  17-2 
Necessity   of  Providing   for, 

17-1 

Not   Credited  to   Asset   Ac- 
count, 17-3,  12 
On  Balance  Sheet,  17-6 
Periodic  Adjustments  for,  17- 

3,  12 
Physical  Depreciation,  i7-2 
Retirement    of    Depreciated 

Assets,  17-7 
Significance  to  Credit  Men, 
17-1 

Direct  Labor 

Daily  Report  of,  24-13 

Definition  of,  23-3 

Element  in  Cost  of  Produc- 
tion, 23-3 

Example  of,  23-3 

Labor  Report  (Illustrated), 
2^-13 

Summarized  by  Cost  Depart- 
ment, 2.^-13 

Direct  Material 

Distinguished  from^Indirect, 

23-3 
Manufacturing  Supplies,  23-2 
Purchased  Parts,  23-2 
Raw  Material,  23-2 
Three  Classes  of,  23-2 

Directors 

Agreements  in  Reorganiza- 
tions, 21-2 

Appointed  by  Stockholders, 
20-S 

Appoint  Oflficers  of  Corpora- 
tion, 20-S 

Dividends  Declared  by,  20-13 

Duties  of,  20-S 

Guided  by  Minute  Book,  20-9 

Meetings  of,  20-S 

Record  for  Meetings  of,  20-S 

Represent  Stockholders,  20-9 

Statements  for,  20-14 

Discounting  Notes 

Customer's  Note  Bearing  In- 
terest, 11-17 

Customer's  Non-interest-bear- 
ihg  Note,  11-13,  14 

Page  20 — Index 


Discounting  Own  Note  (Illus- 
trated), 11-13 

Transferring  a  Customer's 
Note  (lUustrated),  11-16 

Discounts 
Accounts     in     Classification, 

25-8 
Bank  Discount,  11-12 
Calculation  of,  11-12,  17,  18; 

12-6 
Cash  Discoimt,  see  Cash  Dis- 

coimt 
Discoimting   Note   for   Cus- 
tomer, 11-4 
Discounting  Note  Transferred, 

11-16 
Entries  on  Books  (Illustrated), 

11-12,  13 
Entries  for  Discounted  Draft, 

12-6 
Interest    Paid    in    Advance, 

11-12 
On  Purchase  of  Equipment, 

22-14,  24 
Policies  of  Business,  29-15 
Trade     Discoimt     Deducted 

from  Invoice,  22-14 

Dishonored  Notes 
Entry  for  (Illustrated),  11-9, 

10 
Entry  When  Paid  (Illustrated), 

11-10, 11 
Procedure  for,  11-8 

Dissolution 

Causes  of,  19-1 

Closing  the  Books,  19-14 

Final  Distribution,  19-14 

In  Partnerships,  19-1 

Installment  Distribution,  19- 
15 

Involuntary,  19-1,  2 

Liquidating  Assets,  19-14 

Partnership  Agreement  for, 
19-1 

Requirements  of  Partnership 
Law,  19-1 

Satisfying  Creditors,  19-14 

Voluntary,  19-1,  2 

When  New  Partner  Is  Admit- 
ted, 19-5 

When  Partnership  Incorpo- 
rates, 19-12,  13 

When  Partnership  Is  Sold,  19- 
8  to  12 

When  Partner  Withdraws, 
19-3,  4 

With  Liquidation,  19-3,  13 

Without  Liquidation,  19-3 

Dividend  Book 

Basis  for  Entry  in  Cash  Book, 

20-9 
Purpose  of,  20-9 
Used  in  Corporations,  20-2 


Dividends 

Cannot  Be  Paid  until  De- 
clared, 20-13 

Cash,  20-13 

Defined,  20-13 

Distributed  to  Stockholders, 
20-8  9 

Installment,  19-15,  16 

Not  a  Liability  until  Declared, 
20-13 

Not  Declared  on  Treasury 
Stock  20-11 

Not  Paid  Out  of  Capital,  20-13 

On  Profit  and  Loss  Statement, 
20-15 

Paid  Out  of  Accumulated 
Earnings,  20-13 

Stockholders  Entitled  to,  20-8 

Scrip,  Defined,  20-14 

Stock,  Defined,  20-14 

Donated  Surplus 
Credited  with  Donated  Stock, 
20-10,  13 

Double  Entry 

Basis  of  Modem  Accounting, 
26-1 

Changed  from  Single  Entry, 
26-11 

Compared  with  Single  Entry, 
26-1,  10,  11,  13 

Errors  in  Double  Entry  Rec- 
ords, 15-1 

Not  Yet  Universally  Adopted, 
26-1 

Origin,  0-6 

Principle  Explained,  0-7;  3-7 

Safeguards  against  Errors, 
15-13 

Drafts 
Acceptance,  Defined,  12-1 
Accepted  Draft  (Illustrated), 

12-3 
An  Aid  in  Collecting,  12-1 
Bank  12-1   12 
Bank' Draft  (Illustrated),  12- 

11 
Commercial,  12-1, 12 
Defined,  12-1 
Differs  from  Promissory  Note, 

12-1,  11 
Draft  to  Pay  Oneself  (Illus- 
trated), 12-7 
Drawee,  Defined,  12-1 
Drawer,  Defined,  12-1 
Entries  of  Drawee,  12-4 
Entries  of  Drawer,  12-3,  5,  6 
Entries  for  Discounted  Drafts, 

(Illustrated),  12-6 
Entry  when  Accepted,  12-4 
Entry  when  Dishonored,  12-5 
Entries  when  not  paid  (Illus- 
trated), 12-5 
Entries  when  Paid,  12-5 
Entry  when  Received,  12-4 


Drafts — Continued 
Form  of  (Illustrated),  12-2 
Kinds  of,  12-1,  11 
Negotiable,  12-6 
Parties  to,  12-1 
Payable  to  Ourselves,  12-1 
Payee  Defined,  12-1 
Reasons  for  Using,  13-1 
Sight  Drafts.  12-1,2 
Time  Drafts.  12-1 

Drawing  Account 

Adjusted  for  Partnership  In- 
terest, 18-1 

Adjusted  for  Profits  or  Losses, 
18-1 

Charged  with  Withdrawals, 
18-1 

Closed  into  Partners  Capital, 
19-9,  10,  11 

Salaries  Handled  thru,  18-10 

Entries 
Adjusting,  16-10;  17-Z 
Closing,  4-6',  6-4 

Equipment 
Entries  for  Purchase  of,   17-9 
Entries  for  Retirement  of,  17- 

9 
Entries  for  Sale  of,  17-9 

Errors 
Abstracting  the  Ledger,  15-10, 

11,  15 
Analysis  of  Postings,  15-10 
Cash  Journal  Helps  to  Pre- 
vent, 7-1;  15-13 
Caused  by  Omissions,  15-3 
Chief  Causes  of,  15-2 
Detected  by  Internal  Check, 

15-U 
Detected  by  Trial   Balance, 

15-1 
Due  to  Incorrect  Posting,  15-3 
Due  to  Slide  of  Figures,  15-6 
Due  to  Transfer  of  Figures, 

15-13 
Duplicate  Posting,  i5-3 
Errors  in  Principle  Corrected, 

i5-12 
Finding  of,  i5-3 
How  to  Correct,  15-11,  12,  16 
In  Acccoimting  Principles,  15- 

2  3 
In  Accounts,  15-7,  8,  15 
In  Balancing  Accounts,  i5-3 
In  Books  of  Original  Entry, 

15-7,  10,  15 
In  Closing  Process,  15-2 
In   Posting  Closing  Entries, 

i5-2 
In  Setting  Up  Balance  Sheet, 

i5-2 
In  Setting  Up  Trial  Balance, 

i5-3 
In  Trial  Balance,  15-3  to  7,  15 


Journal  Aids  in  Locating,  5-2 

Journal  Reduces,   5-1;  15-13 

Kinds  of,  15-2 

Methods  of  Preventing,  IS- 
IS, 16 

Methods  of  Proving  Work,  15- 
14,15 

Necessity  of  Checking  Post- 
ings, 15-14 

Not  Corrected  by  Erasures, 
15-12 

Prevented  by  Controlling  Ac- 
counts, 15-13 

Prevention  of,  15-13 

Procedure  in  Locating,  15-3,7 

Reverse  Posting  (Illustrated), 
15-8,  9 

Rules  for  Locating,  15-3 

Short  CutsinFinding,15-3,4,5 

Subsidiary  Ledgers  Prevent, 
9-2;  15-5 

Typical  Problems  in,  15-17  to 
22 

Verification  of  Closing  Entries, 
6-7 

Where  to  Begin  in  Correcting, 
15-12 

Where  to  Begin  in  Finding, 
15-3 

Expansion  and  Growth 
Comparative  Statements  Re- 
veal, 29-5 
Dependent  upon  Past  Earn- 
ings, 29-5 
From  Increase  in  Sales,  29-5 

Expenditures 
Capital,  2-5 
Operating  Expenses,  2-4 

Expense  Account 
Accounts  in  Expense  Ledger, 

9-2 
Closed  to  Profit  and  Loss,  4-5, 

6,9 
Entries  in,  5-2,  9 
Has  a  Debit  Balance,  3-5,  9 
Illustrated,  3-7;  4-S 
Need  for  Detail  Accounts,  4-14 

Expenses 

Account  for  Each  Class  of, 
4-14 

Administrative  Expenses  (Il- 
lustrated), 2-5 

Classified  into  Groups,  2-5 

Deferred,  16-6 

Distinguished  from  Disburse- 
ments, 27-15 

From  Depreciation,  17-1 

General  Expenses  (Illus- 
trated), 2-5 

Operating  and  Non-operating, 

2-2,4: 

Selling  Expenses  (Illustrated), 
2-5 


Special    Columns     in     Cash 

Journal,  10-6 
Summarized  on  Statement,  2-3, 

4,5 

Express  Money  Orders 
Check   Issued  by  Company, 

12-11 
Form  of  Commercial  Paper, 

12-11,  12 

Factory  Accounting 
Special  Problems  in,  23-1 

Factory  Expense 

Distinguished  from  Other  Ex- 
pense, 23-4 

Element  of  Cost  of  Produc- 
tion, 23-3 

Examples  of,  23-3 

Federal  Income  Tax  Law 
On    Depreciation    and    Bad 
Debts,  17-1 

Federal  Reserve  Act 
On  Trade  Acceptances,  12-7 

Federal  Reserve  Board 
On  Classification  of  Accounts, 

25-8 

Financial  Statement 

In  Single  Entry  (Illustrated), 
26-5,  6 

Prepared  by  Inventory  Meth- 
od, 26-6 

Financing 
Aided  by  Comparative  State- 
ments, 29-6 
How  Controlled,  29-6 
Thru  Bank  Loans,  29-5 
Thru  Issue  of  Bonds,  29-5 
Use  of  Collateral  Notes,  29-6 

Finished  Goods  Account 
Controls  Finished  Stock  Led- 
ger, 24-3,  17 
When  Credited,  24-18 
When  Debited,  24-18 

Fixed  Assets 
Defined,  1-6 
Depreciation  of,  17-1 
Detail  Accounts,  25-3 
Distinguished     from     Fixed 

Capital,  30-2 
One  Class  of  Assets,  25-3 
Ratio  of  Owned  Capital  to, 
30-9 

Fixed  Capital 
Calculation  of,  30-2 
Defined,  30-2 
Major    Factor    of    Balance 

Sheet,  30-2 
What  It  Represents,  30-2 

Index— Page  21 


Fixed  Liabilities 
Defined,  i-7;  S5-16 
Detail  Accounts,  25-3 
Distinguished  from  Current, 

1-7 
One  Class  of  Liabilities,  35-3 

Fixing  Liability 
Steps  Necessary  In,  11-6 

Floating  Assets 
Another   Term   for   Current, 
1-6 

Folio 
Column  in  Journal,  5-3 
Column  in  Ledger,  5-3 

Formula 

Cost  of  Production,  23-4 

Current  Inventory,  23-11 

Discount,  iJ-15 

Goodwill,  21-6 

Net  Increase  in  Capital,  ^6-8 

Net  Profit,  26-S 

Present  Value  of  Note,  11-15 

Prime  Cost,  23-A 

Proprietorship  Equation,  1-S 

Rate  of  Depreciation,  17-7 

Reciprocal,  29-11 

Freight  In 
Additional  Cost  of  Purchase, 

^5-17,  18 
Recorded  in  Separate  Account, 

25-lS 
Represents    Location    Value, 

55-18 

Functional  Depreciation 
Defined  and  Illustrated,  17-2 

Funded  Debt 

In  Determining  Fixed  Capital, 

30-2 
Place  on  Balance  Sheet,  30-3 

Funds 

Inactive,  30-2 
Petty  Cash,  13-1 

Gas  and  Electric  Companies 
Auxiliary  Records  for,  J 4-8 

General  Expenses 
Analyzed,  29-14 
Detail  Accounts  for,  25-5 
Distributed  to  Departments, 

55-20 
Illustrated,  2-5;  25-20 
Increases  Explained,  59-15 
Related  to  Business  as  Whole, 

55-20 
Subdivision  of,  55-5 
Telephone  and  Telegraph,  29- 

•14 

Page  22— Index 


General  Journal 
Defined,  5-1 
Function  of,  7-8 
Illustrated,  5-3,  5 

Goods  Charged  to  Branch 
At  Cost  Price,  56'-2 
At  Selling  Price,  2S-2 

Goods  in  Process 
Defined,  5^-8 
Inventory  at  End  of  Year, 

55-11 
On  Manufacturing  Statement, 

55-9 
Three  Stages  in  Manufacture, 

54-8 

Goods  in  Process  Account 

An  Asset,  54-3 

Compares  with  Manufactur- 
ing Account,  54-20 

Controls  Cost  Ledger,  54-3, 
17,  18 

Credited  with  Goods  Finished, 
54-3 

Debited  with  Labor  in  Process 
54-17 

Debited  with  Material  in 
Process,  54-3,  17 

Shows  Inventory  of  Goods  in 
Process,  54-18 

Goodwill 

Capital  Profit,  i9-10 

Formula  for,  21-6 

From  Sale  of  Business,  IS-i 

How  Determined  in  Consoli- 
dations, 21-6 

Intangible  Assets,  19-6 

New  Partner  Buys  Interest 
in,  i9-7 

Premium  or  Bonus  to  Part- 
ners, lS-3 

Represents  an  Established 
Trade,  J  9-6 

Represents  Investment  to 
Purchaser,  J  9-12 

Represents  Name  of  Business, 
19-6 

Set  up  before  Closing,  19-12 

Set  up  on  Books  of  New  Cor- 
poration, 51-10 

Valuation  of,  lS-4;  19-2 

Graphic  Chart 

Illustrating  Sales  Report,  29- 
22 

Gross  Profit 

Compared  with  Sales,  5-8 

Defined,  5-6 

Final     Balance    of    Trading 

Account,  4-8 
How  Determined,  5-1,  4 


Guests  Ledger 
In     Nontrading 
57-3 


Concerns, 


Harvard  Bureau  of  Research 
Investigations  on  Bad  Debt, 
J7-11 

Head  Office 

Adjustment  of  Accounts  for, 
58-13  to  15 

Balance  Sheet  of,  28-d> 

Entries  on  Books  of,  5S-6,  7 

Investment  in  Branch,  Ana- 
lyzed, 28-7,  8 

Ledger  Accounts  for  (Illus- 
trated), 28-7,  12,  13 

Purpose  of  Branch  Accoimt, 
28-7 

Report  (Illustrated),  58-12 

Head  Office  Books 
Accounts  in,  58-11 
Entries  on,  58-6 
Have  Branch  Office  Account, 

58-2 
Ledger  Accounts  on,  58-12 
Tie-up  between  Branch  and, 

58-15 

Higher  Account.\ncy 
Consultation  Privilege,  0-9 
Electives,  0-10 
Outline    of    LaSalle    Course, 

0-8,9 
Practical  Solutions,  0-10 
Special  C.  P.  A.  Training,  0-9, 

10 
Specialized  Training,  0-8 
Starting  Point,  0-10 
Study  Procedure,  0-10 
Tied  up  with  Business,  1-1 

Imprest  Fund 
How  Established,  J 5-2 
How  Reimbursed,  J5-3 
Vouchers    and    Receipts    in, 
i5-3 

Imprest  System 
Advantages  of,  i5-2,  3 
How  Established,  i5-2 
In  Branch  Houses,  i5-5 
Method   of   Handling   Petty 

Cash,  i5-l 
Operation  of,  J  5-2 
Other  Uses  of,  15-5 
Used  by  Agents,  15-5 

In  Bills  Register 
Auxiliary  Record,  14-13 

Income 

Deferred,  16-6,  7 
Distinguished  from  Sales,  5-1 
Distinguished  from  Cash  Re- 
ceipts, 57-14 


Income — Continued 
In  Nontrading  Concerns,  ^7-3 
Not  the  Same  as  Cash  Bal- 
ance, 27-16 
Reconciled    with    Cash    In- 
crease, 27-13 

Income  Charges 
Accounts  Included  under,  25-5 
One  Group  of  Accounts,  25-5, 

20 
Purpose  of  Classification,  25-5 
Term  for  Incidental  Expenses, 

^5-5 

Income  Credits 
Accounts     Included     under, 

25-5 
One  Group  of  Accounts,  25-5, 

20 
Purpose  of  Classification,  25-5 
Term  for  Incidental  Income, 

25-5 

Income  Tax  Returns 
Allowance    for   Depreciation, 

i7-l 
Deduction    for    Bad    Debts, 

i7-l 
Prepared  from  Single  Entry 

Books,  26-10 

Incorporation 

Details  Described,  20-1 

Indirect  Labor 
A  Factory  Expense,  25-3 
Defined,  2.i-3 

Element  of  Cost  of  Produc- 
tion, 2j-3 
Examples  of,  25-3 

Indirect  Material 

Distinguished     from     Direct, 
25-3 

Indorsement 
Accounting    Significance    of, 

11-6 
Entry     for     Indorsed     Note 

(Illustrated),  11-6 
Entry  on  Books  of  Indorser 

(Illustrated),  11-S 
"In  Blank*'  or  "In  Full,"  11-6 
Qualified,  11-5 

Indorser  of  Promissory  Note 
Entries  Made  by  (Illustrated), 
2i-10 

In  Freight  Record 
Auxiliary  Record,  i4-13 

Insolvency 
For  Corporations,  2i-l 
For  Partnerships,  19-13 


Installment  Book 

Record  of  Installment  Pay- 
ments, 20-5 

Similar  to  Subscription  Ledg- 
er, 20-5 

Used  by  Corporations,  20-2 

Installment  Distribution 
Adjustment  of  Capital  Ratio, 

19-15 
Advantages  of,  i9-15 
Illustrated,  19-15 
Profit  and   Loss    Ratio    for, 

19-15 
Risk  Involved  in,  19-15 

Instruction  Service 
Outlined,  0-10 

Insurance 
Adjustment    of    Partnership, 

18-14 
Adjustments  for,  14-1;  16-6 
Blanket  Policy,  18-13 
Cash  Surrender  Value,  lS-14 
Distribution  in  Register,  1^-1 
Expired,  H-l;  16-6,  7 
How  Classified  in  Accounts, 

25-8 
Operating  Expense,  2-5 
Partnership,  18-13 
Payment  of  Premium,  18-14 
Prepaid,  16-6 
Recorded  in  Register,  14-1 
Two   Methods   of   Handling, 

16-7 
Unexpired,  14-1,  16-6 

Insurance  Offices 
Auxiliary  Records  for,  14-8 

Insurance  Register 

Contains  Entries  for  Policies, 

14-2 
Distribution  of  Premium,  14-1 
Facts  Recorded,  14-1,  13 
Form  (Illustrated),  14-2 

Intangible  Assets 
Detail  Accounts,  25-3 
One  Class  of  Assets,  25-3 
Ratio  to  Owned  Capital,  30- 
10,  11 

Interest 
Account,  How  Used,  11-12 
Application   of  Legal   Rate, 

18-10 
Average  Date  Method,  18-13 
Calculated    on    Face    Value, 

11-19 
Calculation  of,  11-12 
Compared    to     Wages     and 

Rent,  11-12 
Discounting  Interest  Bearing 

Note,  11-17 


Dollar-a-Month  Method,  18- 
13 

Entries  for  Interest-Bearing 
Notes,  11-12 

Entries  for  Interest  on  Invest- 
ment, 18-12 

Entries  for  Simple  Interest 
(Illustrated),  11-12 

Interest  Accounts,  11-12 

Interest  on  Average  Invest- 
ment, 18-11 

Interest  on  Capital,  18-10,  12 

Need  for  More  Than  One 
Account,  11-12 

Various  Methods  of  Calculat- 
ing, 18-13 

When  One  Account  Is  Suffi- 
cient, 11-12 

Internal  Check 
Defined,  15-14 
Errors  Detected  by,  15-14 
Illustrated,  9-18 
Provided  by  Controlling  Ac- 
counts, 9-18 
Used  in  Banks,  15-14 

Interstate  Commerce  Commis- 
sion 

On  Classification  of  Accounts, 
25-8 

On  Standard  Form  of  State- 
ments, 50-1 

Inventories 

Adjusted  thru  Profit  and 
Loss,  4-13 

Adjusted  thru  Purchases,  4- 
12 

Adjusted  thru  Sales,  4-13 

Adjusted  in  Trading  Account, 
4-7 

Adjustments  in  Closing  Proc- 
ess, 4-7;  25-14 

Compared  with  Receivables, 
50-7,  8 

Compared  with  Sales,  30- 
12,  13 

Current  Inventory  after  Clos- 
ing, 4-11 

Effect  of  Current  Inventory 
on  Profit,  4-16 

In  Determining  Cost  of  Goods 
Sold,  2-4 

In  Manufacturing  Concerns, 
25-6 

Inventory  Account  (Illus- 
trated), 4-3 

Need  of  Record,  24-1 

Occasional  Test  Counts,  24-2 

Perpetual,  14-11 

Physical  and  Perpetual  Rec- 
onciled, 24-2 

Previous  and  Current  De- 
fined, 2-4 

Previous  Inventory  Before 
Closing,  4-11 

Index— Page  23 


Inventories— Continued 

Use  of  Inventory  Sheets,  2Jf-5 
Valued  at  Cost  or  Market, 

^-16 
Without  Control,  SJi-l 

Inventory  Book 

Advantages     of      Columnar 

Form,  lJ!^-6 
Facts  Recorded  in,  H-5,  13 
Form  (Illustrated),  U-5 
Inventory  Prices  in,  H-6 
Loose  Leaf  Sheets  Used,  2^-5 
Purpose  of,  H-5,  6 
Record  of  All  Inventories,  H-5 
Used   in   Trading   Concerns, 

H-5 

Inventory  Method 
Preparing  Single  Entry  State- 
ments, 26-6 

Investment 

Average  Defined  and  Illus- 
trated, 18-8 

Entry  for  Original,  7-8 

Interest  on,  18-9 

Original,  1-2,  3;  ^-10 

Original,  Defined  and  Illus- 
trated, 18-7 

Net,  Defined  and  Illustrated, 
18-7,  8 

Invoice  Register 
Developed     from  Purchase 

Journal,  8-7 
For  Purchasing  of  Equipment, 
U-9 

Invoices 

Approved    before    Payment, 

U-10 
Basis   for  Entries  in  Stores 

Ledger,  2^-5 
Entries  from  Invoices,  8-2,  8. 

17 
Purchase  Invoices,  Form  and 

Use,  8-1,  3,  4 
Sales  Invoices,  Form,  8-8 

Joint  Stock  Companies 
Accounting  for,  19-17 
Compared  with  Corporation, 

19-17 
Compared  with  General  Part- 
nership, i9-17 

Joint  Venture 

Common  in  Colonial   Days. 

i9-17 
Illustrative  Problem,  19-18, 19 
Joint  Venture  Account  (Illus- 
trated), 9-18,  19 
Joint  Ventiure  Statement.  19- 

18 
Special  Accounts  for,  19-17 
Temporary  Partnership,  19-17 

Page  24— Index 


Two  Methods  of  Operating. 
i9-18 

Journal  Entries 

Advantages  of  Journal  Entry 
Closing,  6-1 

A  Time  Saver,  5-1 

Closing  Entries  Made  in,  7-8; 
£2-19 

Closing  Entries  Posted,  (Illus- 
trated), 6-5 

Closing    Process    Journalized 
(Illustrated),  6-4 

Closing  the  Ledger  by  Journal 
Entry,  6-1 

Columnar  Journal  (Illus- 
trated), 10-3 

Compound  Entries  Defined. 
18-6 

Daily  Record,  5-1 

Determining  Closing  Entry 
Figures,  6-3 

Developed  from  Day  Book,5-l 

Entire  Original  Investment 
Entered  in,  7-8;  22-19 

Entries  for  Adjustments  in, 
22-19 

Entries  for  Discount,  i-13 

Entry  for  Dishonored  Note 
(Illustrated),  11-9 

Entry  for  Indorsed  Note 
(Illustrated),  11-6 

Entry  for  Transfer  of  Promis- 
sory Note  (Illustrated),  11- 
6,9 

Errors  in  Making  Entires,i5-1 

Evidence  in  Court,  5-1 

Expanded  into  Special  Jour- 
nals, 5-10 

Five  Advantages  of  Using, 
5-1,  2 

Form  of  Journal  Page  (Illus- 
trated), 5-3 

Function  of.  When  Cash 
Journal  Is  Used,  7-8 

General  Journal  Book  of 
Original  Entry,  5-1 

Helps  to  Reduce  Errors,  5-1 

Subsidiary  Ledgers  Set  Up  by, 
9-2,3,11 

Journal  Bills 
See  Debit  Memorandums. 

Journal  Record 

Complete  Record  for  Trans- 
actions, 5-2 

Importance  of  Journal  Expla- 
nation, 5-3 

In  Nontrading  Concerns,  27-3 

Posting  of,  5-6  to  8 

Proving  of,  i5-l 

Purchase  of  Equipment  En- 
tered in,  i^-9 

Purchase  Transactions  En- 
tered in,  S-4 

Sales  Entered  in  (Illustrated), 
S-10 


Sales  Returns  May  be  En- 
tered in,  8-13 
Single  Entry  (Illustrated),26-4 
Subdivision  of  (Illustrated), 9-1 
Unusual  Transactions  En- 
tered in,  7-8, 9, 16, 17;  22-19 

Journalizing 
Defined,  5-3 
Illustrated,  5-5 
Sales  on  Account  Criticized. 

8-9 
Two  Steps  in,  5-4 

Journal  Voucher 

For  Entries  in  General  Jour- 
nal, 22-19,  22 

Illustrated,  22-20 

Kept  Separate  from  Other 
Vouchers,  22-20 

Made  in  Duplicate,  22-21 

Numbered  Consecutively,  22- 
20 

Saves  Time  for  Auditor,  22-19 

With  Explanation  on  Reverse 
Side,  22-20 

Labor  Report 

Elapsed  Time  Recorded  in, 

2^-13 
Illustrated,  2i-13 
Made  Out  by  Each  Workman, 

2H3 
Nimibered  Consecutively,  2^- 

Summarized  by  Cost  Depart- 
ment, 2^-13 

Law 

Basis  of  Business  Transac- 
tions, 0-8 

Business  Law  Section  of 
Course,  0-9 

Civil  Law,  i9-16 

Common  Law,  i9-16 

Controls  Corporations,  20-1 

Importance  of  in  Partnerships, 
18-1,  2 

Journal  Used  as  Evidence  in 
Court,  5-1 

Partnership  Must  be  Legal, 
19-13 

Requirements  of  Corporation, 
20-1 

Requirements  of  Partnership, 
i9-l,  2 

Settlement  of  Claims  in  Liq- 
uidation, 18-2 

Stock  Must  Be  Issued  as 
Fully  Paid,  20-11 

Lawyers 

Balance  Sheet  for  (Illus- 
trated). 27-8 

Cash  Statement  for  (Illus- 
trated), 27-7 


Lawyers — Continued 
Classification  of  Accounts  for, 

27-3,  4 
Financial  Statements  for,  27-4: 
Statement    of    Income    and 

Expense  for,  27-7 

Ledger 

Accounts  Payable  Ledger,  9-2 

Accounts  Receivable  Ledger, 
9-2 

Analysis  of  Ledger  Accovmts 
(Illustrated),  ^-18 

Becomes  Unwieldy,  9-2 

Blank  Accounts,  5-12 

Business  Transactions  Classi- 
fied in,  3-1 

Classification  of  Ledger  Ac- 
counts, 3-2 

Clients  Ledger,  27-3 

Closing  by  Journal  Entry 
(Illustrated).  6-4 

Closing  Journal  Entries 
Posted,  6-5 

Closing  Process  (Illustrated), 
4-2,  3,  4 

Closing  the  Ledger,  4-1 

Closing  the  Ledger  by  Journal 
Entry,  6-1 

Creditors  Ledger,  9-2 

Customers  Ledger,  9-3 

Entries  Verified  by  Trial 
Balance,  3-10 

Errors  in,  15-S 

Guests  Ledger,  27-3 

How  Kept  in  Balance,  3-8 

In  Nontrading  Concerns,  27-3 

Internal  Adjustment  of,  4-1 

Inventory  Adjustments  on, 
4-7,8 

Ledger  Accounts  with  Entries 
3-5,  6,  7 

Ledger  Page  (Illustrated), 
3-3 

Membership  Ledger,  27-3 

Method  of  Abstracting  (Il- 
lustrated), 15-10,  11,  15 

Modem  Ledger,  Book  of  Ac- 
covmts, 3-1 

Need  for  Summarizing,  4-1 

Posting  of  Columnar  Cash 
Book    (Illustrated),  10-12 

Purchase  Ledger,  9-2 

Primitive  Ledger,  a  Memoran- 
dimi  Book,  0-5 

Primitive  Ledger  (Illus- 
trated), 0-6 

Reasons  for  Closing,  4-2 

Relation  to  Subsidiary  Ledg- 
ers 9-17 

Sales' Ledger,  9-2 

Self  Balancing,  7-7 

Sequence  of  Accounts  in,  3-13 

Subdivision  of,  9-1 

Various  Methods  of  Closing, 
4-14 

When  Closed,  4-2 


Liabilities 

Accrued,  16-5,  13 

Classified,  25-3 

Contingent,  11-6 

Contingent  versus  Real  Lia- 
bility, 11-8 

Current  Liabilities,  Defined, 
1-7'  25-15 

Defined,  J-5;  25-15 

Fixed  Liabilities,  Defined,  1-7; 
25-16 

Fixing  Liability,  11-8 

Head  Office  Account  of 
Branch,  2S-6 

Payment  of,  in  Liquidation, 
i9-2 

Valuation  Accounts,  25-16 

Limited  Partnerships 
Defined,  i9-16 
Features  of  Agreement  in,  19- 

17 
Special  Accounting  Features 
of,  19-17 

Liquid  Assets 
Another  Term  for  Current,  1-6 

Liquidation 
Four  Steps  in,  19-14 
Of  Partnership,  J  9-14 
Methods    of    Settlement    in 
Partnership,  19-14,  15 

Liquid  Strength 
Defined,  30-4 
How  Calculated,  30-4 
Major    Factor    of    Balance 

Sheet,  50-4 
Of  Interest  to  Bankers,  50-4 

Losses  From  Uncollectible 

Accounts 
An  Income  Charge,  25-8,  20 
Based  on  Accounts  Receivable, 

J  7-10 
Based  on  Inspection  of  Open 

Accounts,  i7-10 
Based  on  Sales,  i7-10,  11 
Considered  a  Selling  Expense, 

25-8,  20 
Deduction  for  Federal  Income 

Tax,  ^7-1 
Methods  of  Estimating,  i7-10 
Periodic  Adjustments  for,  J 7-1 
Provision  for,  J  7-1 
Significance    Emphasized   by 

Credit  men,  i7-l 
Special  Account  for,  25-19 

Major  Factors  in  Balance 
Sheet  Analysis 
Borrowed  Capital,  50-5 
Comparison  of,  50-6 
Fixed  Capital,  50-2 
Liquid  Strength,  50-4 
Owned  Capital,  50-4,  5 


Reserve  Strength,  50-4 
Working  Capital,  50-4 

Manufacturing  Account 
Entries  to  be  Made  in  (Illus- 
trated), 25-6 
Inventories  Adjusted  in,  25-6 
Pertains  to  Manufacture  of 

Goods,  25-2 
Shows    Cost   of   Production, 

25-2,  6 
Summarized  in  Manufactur- 
ing Statements,  25-9 

Manufacturing  Accounts 
Classifiction  of,  25-4 
Separate  from  Operating  Ex- 
penses, 25-4 
Special  Accounts,  25-4 

Manufacturing  Concerns 

Distinguished  from  Nontrad- 
ing, 27-1 
Distinguished  from  Trading, 

25-1;  27-1 
Finished  Goods  Stage,  24-2 
Goods  in  Process  State,  24-2 
Illustrative  Problem,  25-4  to 

10 
Information  Wanted,  25-2 
Make  and  Sell  Commodities, 

27-1 
Produce    Finished    Product, 

25-1 
Raw  Material  Stage,  24-2 
Recent  Development  of,  25-1 
Summary  of  Accounts  in,  24- 

18,  19,  20 
Three  Stages  in  Process,  2i-3 
Two  Methods  of  Manufac- 
turing, 24-18 
Use  Perpetual  Inventory,  24-2 
Using  Process  Method,  24-18 
Using  Production  O.  der  Meth- 
od, 24-18 

Manufacturing  Expense 
Depreciation  of  Factory,  i7-l 

Manufacturing  Statement 
Comparative       (Illustrated), 

29-13 
Form  (Illustrated),  25-9 
Purpose  of,  25-9,  11 
Reproduction  of  Manufactxir- 

ing  Account,  25-9 

Manufacturing  Supplies 
Distinguished  from  Mill  Sup- 
plies, 25-3 
Examples  of,  25-2 
One  Kind  of  Direct  Material, 
25-3 

Material  Account 
Controls  Material  or  Stores 
Ledger,  9-2 

Index — ^Page  25 


Material  Requisition 
For    Entries    in    Accounting 

Department,  2^-8 
For  Entries  in  Cost  Depart- 
ment. 2.'t-8 
For  Entries  in  Stores  Ledger, 

Forms  Described,  2i-S 

Forwarded  to  Cost  Depart- 
ment, 2^-9 

Illustrated,  2^-9 

In  General  Accounting  De- 
partment, 2/1-10 

In  the  Factory,  24-9 

In  the  Storeroom,  2i-9 

Made  Out  by  Foreman,  24-9 

Need  for,  2\-S 

Operates  Like  Bank  Check, 
24-8 

Original  and  Duplicate  Com- 
pared, 24-9 

Recorded  in  Detail  on  Cost 
Account,  ^4-17 

Recorded  in  Controlling  Ac- 
count, 24-17 

Maturity  Value 

Basis  for  Calculation  of  Dis- 
count, 11-19 

Interesting-Bearing  Note,  11- 
17 

Maturity  Value,  Defined,  11- 
19 

Non-interest  Bearing  Note, 
11-14,  17 

Used  in  Formula,  11-15 

Membership  Ledger 

Corresponds     to     Customers 

Ledger,  27-3 
In  Nontrading  Concerns,  27-3 

Memorandum  Accounts 
Branches,  28-9 
Consignee,  28-18 
Consignor,  28-19 
Head  Office,  28-11,  15 

Merchandise 
Account,  4-14 
Records,  8-1 

Merchandise  Brokers 
Act  as  Agents,  28-23 
Advantages  of  Selling  thru, 

28-23,  24 
Agreement     with     Principal, 

28-24 
Books  of,  28-24 
Collect  from  Customers,  28-2A 
Commission  of,  28-24 
Duties  and  Rights  of,  28-24 
Reports  of,  28-24 

Merchandising  Concerns 
Buy  and   Sell  Commodities, 
27-1 

Page  26— Index 


Distinguished  from  Non-trad- 
ing, 27-1 

Mergers 

Advantages  (Illustrated).  1-13 
By  Absorption,  21-1,  2 
By  Consolidation,  21-1 
Of  Corporations.  21-1 
Revaluation    of    Assets    in, 

21-12 
Two  Kinds  of,  21-1,  2 

Mill  Supplies 

A  Factory  Expense,  23-3 
Differ    from    Manufacturing 

Supplies,  23-3 
Examples  Given,  23-3 

Minute  Book 

For  Directors.  20-8 
For  Stockholders,  20-8 
Importance  of,  20-9 
Used  by  Accountant,  20-9 
Used  by  Ofificers,  20-9 
Used  in  Corporations,  20-2 

Miscellaneous  Books  and 
Records 
Banks,  14-8 

Electric  Companies,  14-8 
Insurance  Offices,  14-8 
Purchasing  Department  Rec- 
ord, 14-8 
Railroad  Offices,  14-8 
Real  Estate  Agents,  14-8 
Shipping  Clerks  Record,  14-8 

Miscellaneous  Income  and 
Expense 

Effect  on  Profits.  2-6 

Illustrations,  2-6 

Income  Charges  and  Credits, 
25-5 

Part  of  Profit  and  Loss  State- 
ment, 2-5 

Various  Names  Used  for,  2-5 

Mixed  Accounts 
Interest,  11-12 

Old  Merchandise  Account, 
4-U 

Money  Orders 
Express,  i^-11,  12 
Forms  of  Commercial  Paper, 

i^-11 
Postal,  12-11,  12 

MULTICOLUMNAR  JOURNAL 

Illustrated,  10-4 
Limitations  of,  10-5 
Number  of  Columns  in.  i 0-3,  5 
Typical  Problem,  10-15 
Useful  for  Small  Business,  10-3 

Negotiable  Instruments 
Defined,  11-2 
Tests  of  Negotiability,  11-2,  5 


Net  Operating  Profit 
Compared  with  Net  Sales,  2- 

10 
Defined.  2-6 
How  Determined,  2-5 

Net  Profit 

Compared  with  Net  Sales.  2- 
10 

Differs  from  Capital  Increase. 
26-7 

Defined.  2-6 

Distribution  among  Partners, 
18-2,  7,  8,  9 

Factors  Considered  in  Deter- 
mining, 2-1 

Formula  for  Determining,  26- 
8 

How  Calculated  in  Single 
Entry.  26-6,  7 

On  Profit  and  Loss  Statement, 
8-1;  -4-1 

Reduced  by  Expenses.  2-5 

Transferred  to  Capital  (Il- 
lustrated). 4-10 

Net  Worth 

Balancing  Figure  in  Balance 

Sheet,  1-2 
Consists  of  Two  Elements,  1-5 
Corporation,  25-4 
Determined  in  Sale  of  Part- 
nership, 19-9 
How  Determined,  1-5 
Partnership.  25-4 
Single  Proprietorship,  25-4 

Nominal  Accounts 

Called  Profit  and  Loss  Ac- 
counts, 3-2 

Closed  thru  Profit  and  Loss, 
4-6 

Closed  thru  Trading  Account, 
4-6 

Defined,  3-2 

Distinguished  from  Real,  3-2; 
25-2 

Examples  of,  3-2 

Illustrated,  4-4;  6-3 

In  Profit  and  Loss  Statement 
(Illustrated),  2-3 

Omitted  in  Trial  Balance  after 
Closing,  4-11 

Process  of  Closing  (Illus- 
trated), 4-6.  17.  18;  6-5.  6.  7 

Reasons  for  Summarizing.  4-1 

Result  of  No  Nominal  Ac- 
counts. 4-15 

Summarized  in  Profit  and 
Loss  Statement,  4-5 

Statistical  Value  of,  4-14 

Temporary  Record,  5-2 

Various  Methods  of  Closing, 
4-12,  13 

Noncurrent  Assets 
Compared  with  Owned  Capi- 
tal. 50-9 
Compared  with  Sales,  30-14 


NONTRADING  CONCERNS 

Accounting  Procedure  for,  27- 

3 
Books  and  Accounts  Used  for, 

27-2  9 
Cash  Book  for,  27-3 
Clients  Ledger,  27-3 
Concerns  Conducted  for  Prof- 
it, 27-1,  2,  3 
Concerns  Not  Conducted  for 

Profit,  27-1,  2,  9 
Concerns  Regulated  by  Gov- 
ernment, 27-2 
Distinguished    from    Trading 

Concerns,  27-1 
Examples  of,  27-1 
Guests  Ledger,  27-3 
Have  No  Sales  Account,  27-3 
Illustrative  Problem,  27-6,  7, 

8 
Journal  for,  27-3 
Ledger  for,  27-3 
Membership  Ledger,  27-3 
Render  Services,  27-1 
Require     Good     Accounting 

Procedure,  27-2 
Special  Accounting  Features 

in,  27-2,  3 
Special  Statements  for,  27-3 
Time  Book,  27-3 
Two  Kinds  of,  27-1,  2 
Use  of  Revenue  Account,  27- 

9,  11 
Voucher  Register  Used  in,  27- 

9 

Notes 
See  Promissory  Notes 

Notes  Payable  Account 
Debits  and  Credits  in,  ii-3 
Defined,  ii-3 

Not  for  Long  Term  Notes, 
ii-3 

Notes  Payable  Book 

A  Record  for  Numerous  De- 
tails, ii-19 

How  Posted,  ii-22 

Illustrated,  ii-20,  21 

Used  as  Posting  Medium,  ii- 
19 

Used  as  Memorandum  Rec- 
ord, i/-22 

Use  of  Special  Columns,  ii-22 

Notes  Receivable  Account 

Defined,  ii-3 
Separate  Accounts,  25-14 
When  Debited  and  Credited, 
ii-3;  25-14 

Notes  Receivable  Book 
A  Record  of  Numerous  De- 
tails, ii-19 
How  Posted,  ii-22 
Illustrated,  ii-20,  21 


Used  as  Memorandum  Rec- 
ord, ii-22 

Used  as  Posting  Medium,  ii- 
19 

Use  of  Special  Columns,  ii-22 

Notes  Receivable  Discount- 
ed Account 

Entry  in,  ii-6 

Methods  of  Showing  on  Bal- 
ance Sheet,  ii-7 

Not  a  Liability  Account,  ii-7 

Purpose  of,  ii-7 

Related  to  Notes  Receivable 
Account,  11-7;  25-14 

Valuation  Account,  ii-7 

Office  Voucher 

Duplicate  of  Voucher,  22-3 
Illustrated,  22-4,  5 

Old  Merchandise  Account 
Debits  and  Credits  in,  ^-14 
Objections  to,  ^-14;  25-13 
Replaced    by    Separate    Ac- 
counts, A-U;  25-13 

Open  Accounts 
Bad  Debts  Losses,  Estimated 
on,  i7-10 

Operating  Expense 
Depreciation  of  Property,  i7-l 
In  Classification  of  Accounts, 
25-4,  18 

Organization  Expense 

A  Deferred  Charge  in  Con- 
solidation, 2i-10 

Original  Entry 

Books  of,  5-1;  7-1;  8-5 

Out  Freight  Record 
Auxiliary  Record,  i4-13 

Over  and  Short  Cash  Book 
For  Difference  in  Cash,  13-14 

Overhead 

Distributed  on  Direct  Labor 

Hours,  2^-15 
Distribution  of,  2/rl5 
Element  of  Cost  of  Produc- 
tion, 25-2 
Entry  for,  24-15 
Examples  of,  25-3;  24-15 
Included  on  Cost  Sheet,  24-15 

Owned  Capital 
Calculation  of,  50-5 
Defined,  50-4 
Important     in     Negotiating 

Ix)ans.  50-5 
Major    Factor    of    Balance 

Sheet,  50-2,  4 
Same    as    Invested    Capital, 

50-4 


Packing  Slip 
How  Used,   U-9 

Papers 

Business,  i4-8 

Partners 
Additional  Investment  by,  IS- 
IS 
Admitting  New,  18-2,  3,  16; 

i9-2,  5.  6,  7;  20-2 
Average  Investment  of,  18-S, 

16 
Bankruptcy  of,  i9-2;  20-2 
Books  Inspected  by,  i5-2 
Capital    Account    for    Each, 

18-1 
Capital  Invested  by,  18-2,  3 
Contract  Between,  i5-l 
Death  of,  18-2,  15;  i9-2;  20-2 
Duties  and  Powers  of,  i5-2 
Equalizing  Capital  Accounts, 

iS-6,  7 
Insurance  for,  i5-13,  16 
Interest  Allowed  to,  i5-2,  10, 

11,  16 
Liability  of,  20-2 
Mutual  Agreement  of,  i9-2 
Mutual  Disagreement,  i9-2 
Need   for  Special  Loan  Ac- 
count, 18-10 
Net  Investment  of,  i5-7,  16 
New  Partner   Buys   Interest 

in  Business,  i9-5,  6 
New  Partner  Buys  Interest  in 

Goodwill,  i9-7 
New  Partner  Buys  Interest  in 

Profits,  i9-7 
Original  Investment  of,  18-7, 

16 
Profits  and  Losses  Shared  by, 

18-2,  7,  16 
Salaries  Allowed,  18-2,  10 
Side   Transactions    Between, 

i5-2 
Use    of    Drawing    Accounts, 

18-1,  10 
Withdrawals  Made  by,  i5-2,  9 
Withdrawal  of,  i9-l,  2;  20-2 

Partnership 

Adjustment  of  Capital  Ac- 
counts, i5-l 

Admitting  New  Partner  in, 
18-2,  3,  16 

Advantage  of  Written  Agree- 
ment in,  18-1 

Advantages  of,  18-3 

Articles  of  Agreement,  18-1 

Average  Investment  in,  i5-8, 
16 

Based  on  Contract,  18-1 

Basis  of  Sharing  Profit  and 
Loss,  18-2,  7,  16 

Capital  Account  for  Each 
Partner,  18-1 

Causes  of  Dissolution,  i9-l 

Index— Page  27 


PARTNERSfflP — Continued 
Capital  Ratio  in  Distribution, 

19-15 
Chancellor  Kent's  Definition 

of,  18-1 
Closing  Entries  for  Proprietor- 
ship, 18-5,  16 
Compared  with  Corporation, 

SO-2 
Converted  into  Corporations, 

SO-1 
Duration  of,  18-2 
Entries  for  Sale  of,  J  9-9,  10 
Formation    of    (Illustrated), 

18-1,  15 
Formed  by  Admitting  New 

Partner,  18-2,  3, 16;  i9-5,  6, 

7 
Formed  with  Original  Invest- 
ment, 18-3 
Importance  of  Organization, 

18-1 
Insurance  of  Partners,  18-13, 

16 
Interest  in  Partnership  Pur- 
chased, 19-5,  6 
Interest  on  Drawings,  18-10, 

11.  16 
Interest  on  Investment,  18-2, 

10,16 
Joint  Stock  Companies,   19- 

16,  17 
Joint  Ventures,  J  9-16,  17 
Limited,  i9-16,  17 
Merger  of  Several  Businesses, 

lS-4,  5 
Method   of  Keeping   Books, 

18-2,  7 
Net  Investment  in,  18-7,  16 
Opening  Entries  for,  18-2,  6, 

16 
Operation  of,  18-7 
Original  Investment,  18-2,  7, 

8,  16 
Partner's  Duties  and  Rights 

Specified,  18-2 
Provision   for  Discontinuing, 

18-2,  16 
Reasons    for    Incorporating, 

i9-12 
Salaries  in,  18-2;  10-16 
Sale  of,  19-S 
Sale  of  Goodwill,  19-8 
Sold    for    Less    Than    Net 

Worth,  19-8 
Sold    for    More   Than    Net 

Worth,  19-8 
Sold  for  Net  Worth,  19-8 
Special,  19-16 
Special  Accounting  Problems 

in,  18-1 
Three  Conditions  of  Forma- 
tion, 18-2,  3,  16 
Use  of  Drawing  Accounts,  18- 

1,  9,  10,  16 
Withdrawals  Specified,  15-2 

Page  28— Index 


Partnership  Accounting 
Dissolution  Problems,  19-1 
Entries  for  Formation,  15-2,  3 
Record  of  Operations,  15-7,  8 
Special  Problems.  15-1 

Partnership  Agreement 

Aid  to  Accountant,  15-2 

Details  of,  15-2 

Disposition  of  Assets  in  Disso- 
lution, 19-2 

Distribution  of  Profit  and 
Loss,  15-7 

Duration  of  Partnership  Spe- 
cified, 19-2 

Illustrated,  15-18 

Importance  of,  15-1,  2 

Limits  Amount  of  Withdraw- 
als, 19-10 

Interest  on  Capital  and  Draw- 
ings, 15-10,  11 

Procedure  when  Partner  Dies, 
19-2 

Valuation  of  Goodwill,  19-2 

Written  or  Oral,  15-1 

Partnership    Insurance   Ac- 
count 
Adjustment  of,  15-15 
An  Asset  Accoimt,  15-15 
An  Expense  Accoimt,  15-14 
Credited  at  Time  of  Settle- 
ment, 15-15 
Should    not    be    Overstated, 
15-15,  16 

Partnership  Law 
Adjusting  Entries  Conform  to, 

19-2 
Important  in  Dissolution,  19-1 
Priority  of  Claims,  Prescribed 

by,  19-2 
Requirements  of,  19-2 

Pass  Book 
See  Bank  Pass  Book 

Patents 

Intangible  Assets,  50-10 
Purchased  with  Capital  Stock, 
50-10 

Payee 
Entry  on  Books  of,  1^-4,  5 

Pay  Roll 

Accrued,  22-14;  2-^-15 
Distribution  of,  ^4-15 
For  Direct  Labor,  2^-14 
For  Indirect  Labor,  2.J-14 
Illustrated,  24-14 
Made  up  from  Time  Reports, 

24-14 
Verified  by  Cost  Department, 


Pay  Roll  Account 

Debited  from  Pay  Roll  Book, 
14-5 

Pay  Roll  Book 
Approval  of,  14-5 
Columns  Explained,  14-4 
Contains  Facts   for  Posting, 

14-5 
Form  (Illustrated),  14-4 
Pay  RoU  Sheets,  14-3,  4 
Record  of  Payrolls,  14-3, 13 

Percentages 
Used  in  Comparative  State- 
ment, 29-10, 11 

Perpetual  Inventory 

Advantages  of,  24-2 

Aid  to  Accountant,  14-11 

Cards  Used  for,  24-1 

Controls  Inventories,  24-1,  2 

Defined,  24-1 

Facilitates  Insurance  Adjust- 
ments, 24-2 

Formula  for  Current  Inven- 
tory, 25-11 

Illustrated,  14-11 

Illustrative  Problem,  24-1 

Important  in  Factory  Ac- 
counting, 24-1,  2 

Need  for,  25-11;  24-1 

Reconciled  with  Physical  In- 
ventory, 24-1 

Stores  Record,  14-11 

Used  in  Trading  Concerns, 
24-2 

Various  Forms  of,  14-11 

Verified  by  Physical  Count, 
14-11 

Personal  Accounts 
One  Class  of  Accounts,  25-2 
Subsidiary  Ledgers  for,  9-2 
Taken  out  of  General  Ledger, 
9-2 

Petty  Cash  Account 

Balance  Represents   Current 

Asset,  25-14 
Purpose  of,  25-14 
When  Credited,  25-14 
When  Debited,  25-14 

Petty  Cash  Book 
Entries  for  Disbursements  in, 

15-3 
Entry  for  Imprest  Fund,  15-2 
Form  of,  15-1 

How  Related  to  Fund,  15-1 
Illustrated,  15-2 
Postings  From,  15-3 
Used    as    Posting    Medium, 

15-3 


Petty  Cash  Fund 
Controlled  by  Petty  Cashier, 

13-1 
How  Shown  on  Balance  Sheet, 

J  5-5 
Imprest  System,  13-1 
Methods  of  Handling,  13-1,  2 
Purpose  of,  25-1 
Reimbursed  by  Any  Amovmt, 

13-2 
Reimbursed        by        Roimd 

Amounts,  13-2 
Special  Book  for,  13-1 
Transactions  (Illustrated),  13- 

1 

Petty  Cashier 
Duties  of,  13-2 
In  Charge  of  Petty  Cash,  15-1 

Petty  Cash  Systems 
Imprest  System,  13-2,  3 
Methods  Compared,  13-5 
Methods  for  Handling  Fund, 

13-1 
Other  Systems,  13-5 

Physical  Depreciation 
Defined  and  Illustrated,  17-2 

Plant  and  Equipment  Record 
Used  in  Business,  lJf-13 

Postage  Stamps 
Entries  when  Received,  13-6 
Placed  in  Petty  Cash  Drawer, 
15-6 

Postal  Money  Orders 
Form  of  Commercial  Paper, 

12-11 
Issued  by  Local  Postmaster, 

12-11 

Posting 
Analysis  of  Credits,  15-10 
Analysis  of  Debits,  15-10 
Cash  Journal,  7-3,  6,  7,  8,  9; 

S-4;  9-5,  6 
Check  Register,  ^2-15 
Columnar  Jcumal,  10-2,  3 
Defined,  5-3 

Errors  due  to  Duplicate,  15-3 
Errors  due  to  Incorrect,  15-3 
Errors  due  to  Reverse,  15-8,  9 
General  Rules  for,  9-6 
How  to  Save  Time,  5-10 
Importance  of  Cross  Refer- 
ence, 5-9 
Journal,  5-6  to  8 
Necessity  of  Checking,  15-14 
Notes   Payable   Book,    11-19 
Notes  Receivable  Book,  21-19 
Petty  Cash  Book,  15-3 
Petty    Cash    Expenditures 

Posted,  15-4 
Possibility  of  Errors  in.  15-1 


Primitive  Method  of,  0-7 
Process  Illustrated,  5-6,  7,  8 
Purchase  Journal,  5-4,  5,  6 
Sales  Journal,  9-4,  6 
Simple  Journal,  10-2 
Voucher  Register,  22-15;  2^-7 
Voucher  System  Saves  Time 
in,  22-21 

Posting  Ticket 
Received  by  Accounting  De- 
partment, 5-2 

Practical  Solutions 
Purpose,  0-10, 11 

Preferred  Capital  Stock 

Cumulative,  20-10 

Distinguished  from  Common, 
20-10 

May  Have  Preferred  Claim 
on  Assets,  20-10 

Provides  First  Claim  on  Prof- 
its, 20-10 

Rights  of  Holders  of,  20-10 

Separate  Record  for,  20-10 

When  More  Desirable  than 
Common,  20-16 

Prepaid  Rent 
Adjustment  for,  16-5,  6 

Present  Value 
Defined,  11-14,  19 
Formula  for,  11-15 

Prime  Cost 
Formula  for,  25-4 

Principal 

Books  of,  25-24 
Consignor,  25-16 

Problems 

See  Typical  Problems 

Process  Manufacture 

Distinguished      from      Order 

Method,  2^-18 
Examples  of,  24-18 

Production  Order 
Accounts  in  Cost  Ledger,  24- 

11 
Copy  to  Cost  Accountant,  2^- 

11 
Copy  to  Factory  Department, 

24-11 
How  Issued,  2^-11 

Production  Order  Method 
Distinguished    from    Process 
Method,  24-18 

Profit 

Disposition  of,  29-1 
Distribution   of   Partnership, 
15-7 


Gross  Profit  Defined,  2-6 
Net  Operating  Profit  Defined, 

2-6 
Net  Profit  Defined,  2-6 
Partner  Buys  Interest  in,  19- 

7 
Three  Classes,  2-6 

Profit  and  Loss  Account 
Debits  and  Credits  in,  4-10 
Divided  into  two  sections,  23- 

8 
How  Used  in  Manufacturing 

Concerns,  25-8 
Illustrated,  4-9 
Svunmary  Account  in  Closing, 

4-6;  25-2 

Profit  and  Loss  Accounts 
For  Trading  Activities,  25-17 

Profit  and  Loss  Statement 

Comparative  (Illustrated),  29- 

12,  16 
Comparative     Departmental, 

(Illustrated),  29-20 
Contents  of,  2-12 
Cost  of  Goods  Sold  Section, 

2-4 
Cost  of  Production  in,  25-9, 

10 
Covers  a  Period,  2-7 
Cumulative  (Illustrated),  29- 

18 
Details  of,  2-3 
Distinguished  from  Balance 

Sheet,  2-1 
Five  Important  Uses  of,  2-8 
For  Corporations,  20-15 
General  Outline,  2-2 
How  Interpreted,  2-12 
Importance  of  Heading,  2-7 
In  Actual  Business,  2-2 
Main  Purpose  of,  25-11 
Miscellaneous     Income     and 

Expense  Section,  2-5 
Of  Consignee,  25-23 
Of  Consignor,  25-23 
Prepared  from  Single  Entry 

Books,  26-9,  10 
Proper  Arrangement  of  De- 
tails, 2-7 
Relation   to    Balance    Sheet 

(Illustrated),  2-11,  12 
Report    Form    (Illustrated), 

2-3;  5-12 
Report  of  Business  Progress, 

2-1,  10 
Sales  Section  in,  2-4 
Should  be  Complete,  2-7 
Summary   of   Four   Factors, 

2-1 
Various  Headings  Used,  2-7 

Promissory  Notes 
Accepted  Draft  Becomes,  12- 
2.4 

Index — Page  29 


Promissory  Notes— Continued 
Calculation  of  Discount  on, 

11-12 
Defined  by  Law,  11-2 
Demand  Note,  11-3 
Demand     Note     Similar     to 

Draft,  12-1 
Discounted  when  Transferred 

to  Creditor.  11-16 
Discounting    Note    for    Cus- 
tomer, li-14 
Discounting  Our,  11-13 
Distinguished    from    Drafts, 

12-1,  11 
Entries  for  Payment  of  (Il- 
lustrated), 11-7,  8 
Entries  Made  by  Indcrser  of 

(Illustrated),  11-10 
Entries  Made  by  Maker  of 

(Illustrated),  11-11 
Entries   Made   by   Payee   of 

(Illustrated),  11-7,  9 
Entries  When  Issued,  11-3,  4 
Entry  for  Issue  (Illustrated), 

11-5 
Entry  for  Receipt  of  (Illus- 
trated), 11-5 
Entry  when  Transferred,  11-6 
Entry   for    Dishonored  Note 

(Illustrated),  11-9 
Entry  for  Protest  Fee,  11-9 
Entry  for  Indorsed  Note  (Il- 
lustrated), 11-6 
Entry     showing     Contingent 

Liability,  11-6 
Facilitate      Business    Opera- 
tions, 12-1 
Form  of,  11-1 

Form  of  Business  Paper,  H-S 
Form  of  Short  Term  Note, 

11-2 
Formula  for  Discount,  11-15 
How  Discount  is  Determined, 

11-15 
How  Drafts  Differ  from,  12-1 
How  Unexpired  Time  is  Cal- 
culated, 11-19 
Important    Features    to    Ac- 
countant, 11-1 
Indorsement   "In   Blank"   or 

•'In  Full,"  11-6 
Interest  Accounts  on   (Illus- 
trated), 11-12 
Interest- Bearing,  11-12 
Issued  for  a  Loan,  11-i 
Long  Term  Notes,  11-3 
Maturity  Value,  11-17 
Mortgage  Notes,  11-3 
One  Kind  of  Negotiable  In- 
strument, 11-2 
Parties  to,  11-2 
Present  Value  of,  11-15 
Preferred  to  Open  Accounts, 

12-1 
Procedure    if    Note    Is  Dis- 
honored (Illustrated),  US, 
9 

Page  30— Index 


Qualified  Indorsement  of  (Il- 
lustrated), 11-5 
Readily  Discounted,  12-1 
Relation  to  Business,  11-1 
Requirements  of  a  Negotiable, 

11-2 
Similar  to  Negotiable  Drafts, 

12-6 
Special  Books  for,  11-19 
Special  Columns  for,  11-22 
Two  Kinds  of,  11-2 
Typical  Problems,  11-23 
Use  of,  11-1 

Written   Evidences   of   In- 
debtedness, 12-1 

Proof  of  Posting 
Defined  and  Explained.  ^6-5 
Illustrated,  26-5 

Proprietorship 

Hew  Determined,  1-5 
Proprietorship  Equation   (Il- 
lustrated), i-8,  9,  10,  11 

Protest  Fee 
Entry  for  (Illustrated),  11-9 

Purchase  Account 

Classified  under  Trading,  25- 

17 
Closed  into  Trading,  ^5-17 
Debits  and  Credits  in,  ^5-17 

Purchase  Allowances 
Differ  from  Purchase  Returns, 

2-6;  25-17 
Has  Credit  Balance,  25-17 
How    Handled    in    Voucher 

System,  22-18 
In  Trading  Group,  ^5-17 

Purchase  Book 
See  Purchase  Journal 

Purchase  Cycle 
Illustrated,  8-2 

Purchase  Discounts 
An  Income  Charge,  25-8 
Deducted     from     Purchases, 

25-8 
Entered  in  Cash  Book,  10-6 
Entered    in    Cash    Disburse- 
ments Book,  10-13 
Journal  Entry  for,  10-13 
Objection  to  Entering  in  Cash 

Book,  10-13 
Other  Methods  of  Handling, 
20-13 

Purchase  Invoices 

Approved    Before    Payment, 

H-10 
Basis  for  Entry  in  Purchase 

Book,  H-9,  14 
Form  (Illustrated),  8-3 


Made  in  Duplicate  or  Tripli- 
cate, 8-3 

Numbered  and  Filed,  i^-lO 

Purchase  of  Equipment,  U- 
9,  14 

Received  by  Purchasing  De- 
partment, 5-1 

Purchase  Journal 
Advantages  of,  5-4 
A  Merchandise  Record,  8-1 
Columnar    Purchase  Journal 

(Illustrated),  iO-8 
Current  Postings  from,  8-7 
Details  Recorded  in,  8-6 
Double   Entry   Principle   not 

Violated,  8-7 
Expanded  into  Voucher  Regis- 
ter, 8-7 
Form  (Illustrated),  8-5 
For    Purchases    on    Account, 

-5-10 
How     Posted      (Illustrated), 

8-6,7 
Items  Not  Entered  in,  8-7 
May  Include  Cash  Purchases, 

8-7 
Saves  Time  in  Posting,  8-6 
Shows  Date  of  Invoice,  <9-6 
Total  Postings  from,  8-7 
Use  of  Columns  in,  8-5 
With    Columns    for    Depart- 
ments, iO-8 

Purchase  Order 

Copy  in  Purchasing  Depart- 
ment, 8-3 

Copy  Sent  to  Stores  Keeper, 
8-3 

Copy  Sent  to  Supply  House, 
8-3 

Form  (Illustrated),  8-3 

Routing  of,  8-1 

Purchase  Requisition 

Duplicate  in  Stores  Keepers 

FUe.  8-3 
Form  (Illustrated),  8-3 
Original   for  Purchasing  De- 
partment, 8-3 
Used    in    Purchase    Routine, 
8-1;  21t-6 

Purchase  Returns 
A  Credit  Account,  25-17 
Closed  into  Purchases,  25-17 
Differ  from  Purchase  Allow- 
ances, 2-6;  25-17 
Has  a  Credit  Balance,  ^5-17 
How    Handled    in    Voucher 

System,  22-18 
How    Recorded,    when    Nu- 
merous, 5-16 
In  Trading  Group,  25-17 
Usually   Entered   in   General 
Journal,  5-16 


Purchase  Returns  Book 
See  Purchase  Returns  Journal 

Purchase  Returns  Journal 
Entries    Made    from    Credit 

Memorandums,  S-15 
Used  for  Numerous  Purchase 

Returns,  S-15 

Purchase  Routine 

Duties  of  Receiving  Clerk,  S-l 
Duties  of  Stores  Clerk;  8-1 
Forms   Used   in  (Illustrated) 

8-3 
Function  of  Accounting  De- 
partment, S-l 
Function  of  Purchasing  De- 
partment, S-l 
In   Accounting    Department, 

8-2 
Outline  of  Routine,  S-l;  3^-6 
Purchase  Cycle  (Illustrated), 

S-2 
Purpose  of  Posting  Ticket,  S-2 
Purpose  of  Purchase  Order, 

S-l 
Purpose  of  Purchase  Requisi- 
tion, S-l 

Purchases 

Analysis  by  Departments,  8-7 
10-6 

Authorized  by  Purchasing  De- 
partment, S-l 

Cash  Purchases  in  Cash  Jour- 
nal, S-2;  10-6 

Cash    Purchases    thru    Pur- 
chase Book,  8-7 

Cost  of,  ^5-17,  18 

Credit   Purchases   thru   Pur- 
chase Book,  S-2,  16 

Entries  in  Journal  for,  S-4,  5 

Forms    Used   in   Connection 
with,  8-3 

Method  of  Handling,  S-l 

Recorded  by  Accounting  De- 
partment, S-2 

Routine  of,  S-l,  2 

Purchasing  Department 
Analysis  of  Discounts  by,  10-6 
Duties  of,  10-6;  2^-7 
Issues  Purchase  Order,  2l^-6 
Receives    Receiving    Report, 

U-\\ 
Relation  to  Purchase  Routine, 
S-l 

Qualified  Indorsement 
Defined,  ii-5 
Significance,  11-b 

Quick  Assets 

Another   Term    for   Current, 
i-6 

Railroad  Offices 

Auxiliary  Records  for,  7^-8 


Rates 

Depreciation,  Determined,  17- 

7 
Formula  for  Depreciation,  17-7 

Ratios 
Application  to  Abnormal  Busi- 
ness, 50-15 
Causes  for  Decreases  in,  50-7 
Causes  for  Increases  in,  50-7 
Current  Defined,  50-7 
Practical  Use  of,  50-17 
Static,  50-6  to  11 
Two  Classes  of,  50-6 
Use  of  Static,  50-15 
Use  of  Velocity,  50-16,  17 
Velocity,  50-11  to  15 

Raw  Materials 
Accounted    for    Like    Cash, 

^4-4 
Classified  in  Store  Room,  5^-4 
Kept  in  Store  Room,  2}^-A 
Need  of  Accurate  Record  for, 

21t-A 
Represents     Investment     of 

Cash,  21t-A 

Raw  Materials  Account 
Agreement  with  Stores  Ledg- 
er, n-6,  10,  11 
Controls  Stores  Ledger,  2!t-3 
Credited  with  Materials  Put 

in  Process,  21f-3 
Debited  with  Goods  Received, 
2h-3,  6,  7 

Real  Accounts 

Called  Balance  Sheet  Ac- 
counts, 5-2 

Defined,  5-2 

Distinguished  from  Nominal, 
5-2;  25-2 

Examples  of,  5-2 

Illustrated,  4-2,  3,  4 

Not  Closed,  4-5 

Real  Estate  Agents 
Auxiliary  Records  for,  i4-8 

Realization  and  Liquidation 
Account 
Entries  in,  19-lQ,  11 
How  Used,  19-10 

Receiver 

Duties  in  Reorganization,  21-3 

Receiving  Clerk 
Fills  Out  Receiving  Report, 

14-11 
Relation  to  Purchase  Routine, 

S-l 

Receiving  Records 
Made    in    Triplicate,    14-11; 

2If-7 
Report  (Illustrated),  14-10 


Reciprocal 

Formula  Used  in  Determining, 
^9-11 

Reconciling  Bank  Balance 
Items  Reconciled,  15-8,  9 
Purpose  of,  15-8 
Why  Necessary,  15-8 

Recourse 
Indorsement  Without,  11-5 

Renewals 

Distinguished     from     Depre- 
ciation, 17-9 
Of  Parts,  17-9 

Rent  Expense 
Account  for,  16-5 
Ajusted,  16-6 

Rent  Income 
A  Deferred  Credit,  16-6,  7 

Reorganizations 

Accounting  Procedure   for, 

^1-2 
Appraisals  in,  ^1-2 
Distinguished   from  Mergers, 

^1-1 
Entries  to  Effect,  21-S 
Examples  of,  ^1-1 
Illustrative  Problems,  21-2,  3, 

4,  5 
Of  Corporations,  ^1-1 
Problem  of  Valuation  in,  ^1-2 
Reasons  for,  ^1-1 
Source  of  Facts  in,  ^1-2 
Two  Steps  Necessary  in,  ^1-2 

Repairs 
Affect  Life  of  Assets,  17-9 
Distinguished  from  Deprecia- 
tion, 17-9 

Reports 

Account  Sales,  (Illustrated), 
28-20 

Auditing,  1-14 

Branch  Report,  (Illustrated), 
28-12 

Classified  Balance  Sheet,  1-11 

Comparative  Sales  Reports, 
^9-21 

Consignees  Report  to  Con- 
signor, ^S-19 

Financial  Conditions  of  Busi- 
ness, 1-11 

For  Bankers,  1-12 

For  Income  Taxes,  1-14 

For  the  Proprietor  of  a  Busi- 
ness, 1-12 

For  Trade  Creditors,  1-13 

Graphic  Chart,  ^9-22 

Monthly  Operating  Reports, 
1-1 

Index— Page  31 


R  EPORTS — Continued 
Must  be  Accurate  and  Com- 
plete, 3-1 
Need  for  Reports,  1-2 
Net  Profit  Determined  by,  i-1 
Of  Merchandise  Broker,  25-24 
Operating  Progress  of  Busi- 
ness, 3-1,  10 
Profit   and   Loss   Statement, 
S-1,  10 

Replacements 
In  Clubs,  27-11 
Of  Depreciated  Assets,  17-9 
Old  Assets  Sold,  17-9 
Old  Assets  Traded  in,  17-9 
Two  Cases  of,  17-9 

Reserve  for  Depreciation 
A  Valuation  Account,  17-4 
Charged    When    Asset    is 

Retired,  17-7 
Credited  with  Annual  Depre- 
ciation, J  7-4 
Has  a  Growing  Credit  Bal- 
ance, i7-4 
Methods  of  Handling  on  Bal- 
ance Sheet,  17-6,  12 
Not  a  Liability,  17-4,  12 
Offset  to  Asset  Account  (Illus- 
trated), 17-4,  5 
On  Asset  Side,  17-6,  12 
On  Liability  Side,  17-6,  12 
Sometimes  Called  Allowance 

for,  J  7-5 
Valuation    Function,     (Illus- 
trated), 17-5,  12 

Reserve  for  Doubtful  Ac- 
counts 
Credited  with  Monthly  Allow- 
ances, 17-11 
In  Working  Sheet,  17-12 
Not  a  Liability,  i7-12 
On  Balance  Sheet,  17-11,  12 
Subsequent  Payment  by  Cus- 
tomer, 17-11 
Valuation  Account,  i7-12 

Reserves 

Can  be  Returned  to  Surplus, 

20-12 
For  Depreciation,  i7-4,  12 
For  Doubtful  Accounts,   17- 

11,  12 
In  Working  Sheet,  J 7-12 
On  Balance  Sheets,  17-6,  11, 

12 
Set  Up  Out  of  Surplus,  20-12 
Valuation  Accounts,  17-4,  11, 

12 

Reserve  Strength 
Defined,  50-4 
How  Computed,  50-4 

Page  32— Index 


Major    Factor    of    Balance 

Sheet,  50-4 
Of  Interest  to  Banker,  50-4 

Revenue  Account 
In  Charitable  Institutions,  27- 

9 
In  Clubs,  (Illustrated),  27-11 

Safeguards 

For  Cash,  7-1 
Salaries 

Partners,  18-10 
Sale 

Of  Partnership,  J  9-8.  9,  10,  11 

Of  Single  Proprietorship,  18- 
4,5,6 

Sales 

Bad  Debts  Losses  Based  on, 
i7-10 

Basis  for  Gross  Profit  Compari- 
son, 2-8,  9 

Basis  for  Net  Profit  Compari- 
son, 2-10 

Basis  for  Velocity  Ratios, 
50-11 

Cash  Sales  Entered  in  Cash 
Book,  8-9;  10-6 

Chief  Source  of  Income,  2-1 

C.O.D.  Transactions,  50-12 

Come  from  Inventories,  50-11 

Compared  with  Accounts  Re- 
ceivable, 50-11,  12 

Compared  with  Inventories, 
50-12,  13 

Compared  with  Noncurrent 
Assets,  50-14,  15 

Compared  with  Owned  Capi- 
tal, 50-13,  14 

Cost  of  Goods  Sold,  2-1 

Credit  Sales,  8-16;  50-12 

Distinction  between  Gross 
and  Net,  2-1 

Entering  the  Orders  on  Books, 
8-8,9 

Filling  Orders  and  Delivering 
Goods,  8-S 

Getting  the  Orders,  8-8 

Journal  Entries  for,  (Illus- 
trated), 8-9 

Operation  of  Sales  Depart- 
ment, 8-8 

Produce  a  Profit  or  Loss,  50-11 

Result  in  Accounts  Receiv- 
able, 50-11 

Shorter  Method  of  Recording, 
8-11 

Three  Functions  in  Sales 
Transactions,  8-8 

Total  Cash  Sales  Easily  De- 
termined, 10-13 

Sales  Account 

A  Temporary  or  Nominal 
Account,  5-2,  13. 


Closed  to  Trading,  4-5,  6,  8; 

25-18 
Closed  Directly  to  Profit  and 

Loss,  4-13 
Closing,  (Illustrated),  4-6 
Has  a  Credit  Balance,  5-5,  14; 

25-18 
Illustrated,  5-6;  4-4 
Used  as  a  Trading  Account, 

4-13 
When  Debited,  25-18 

Sales  Allowances 

Credit  Memorandum,  Noti- 
fication of,  8-15 

Deducted  from  Gross  Sales, 
2-1;  25-18 

Distinguished  from  Sales  Re- 
turns, 2-4;  8-15 

On  Profit  and  Loss  Statement, 
25-18 

Recorded  in  Special  Journal, 
8-14 

Sales  Allowances  Book 
Similar  to  Sales  Returns  Book, 

5-14 

Sales  Book 
See  Sales  Journal 

Sales  Department 

Development  and  Operation 
of,  5-8 

Sales  Discounts 
An  Income  Credit,  25-8 
Deducted  from  Sales,  25-8 
Discounts    Entered    as    Re- 
ceipts, 10-14 
Discounts   Entered   in   Cash 

Book,  10-13 
Entered  in  Cash  Book,  10-6, 

13 
Entered  in  General  Journal, 

10-13,  14 
Other  Methods  of  Handling, 
10-13 

Sales  Invoice 

Basis  for  Entry  in  Books,  5-8; 
14-8 

Carbon  Copies  Serve  as  Sales 
Journal,  5-16 

Distinguished  from  Sales 
Tickets,  14-8 

Form,  (Illustrated),  5-8 

Information  Contained  in,  5-8 

In  Wholesale  Business,  14- 
8,  14 

One  Kind  of  Business  Paper, 
14-8 

Original  Record  of  Sales  Or- 
der, 14-8,  9 

Routing  of  Sales  Invoices,  5-9 


Sales  Journal 
Additional  Columns  in,  10-6 
Columnar,  (Illustrated),  10-7 
Developed     from    Columnar 

Journal,  10-5 
Form,  (Illustrated),  5-11 
Posting  of,  S-11 
Posting  of  Columnar,  10-S 
Posting  of  Special,  8-16 
Shorter  Method  of  Recording 

Sales,  5-11 
Special  Form  of,  5-16 
Transactions  to  be  Entered 

in,  5-13 

Sales  Manager 
Analysis  of  Discounts  by,  10- 

6 
Departmental    Analysis    by, 

10-5,  6 

Sales  Reports 
Comparative,  29-21 
Contents  of,  ^9-21 
Illustrated  by  Graphic  Chart, 

^9-22 
Purpose  of,  ^9-21 
Used  With  Graphic  Charts, 

29-21 

Sales  Returns 

Credit  Memorandum,  Noti- 
fication of,  5-14 

Deducted  from  Gross  Sales, 
2-1;  35-18 

Differ  from  Sales  Allow- 
ances, 2-A;  5-15,  16 

May  Be  Entered  in  General 
Journal.  5-13 

May  Be  Entered  in  Special 
Journal,  5-14 

Negative  to  Sales  Account, 
25-18 

On  Profit  and  Loss  State- 
ment, 25-18 

Sales  Returns  Book 
See  Sales  Returns  Journal 

Sales  Returns  Journal 
Columns  Explained,  5-14 
Form,  (Illustrated),  5-14 
Posting  of,  5-14 
Special  Forms  of,  5-16 

Sales  Routine 

Billing  Process  in  Large  Con- 
cerns, H-9 

Bill  or  Invoice,  H-9 

Duties  of  Billing  Clerk,  U-9 

Packing  Slip,  U-9 

Purpose  of  "Shipping  Ticket 
Set,"  U-9 

Shipping  Memorandum,  U-9 

Shipping  Ticket,  U-9 

Taking  Sales  Order,  5-8;  U-S 

Three  Steps  in,  5-8 

Ticket  Auditing  Copy,  li-9 


Sales  Tickets 

Adding  Machine  Lists  from, 
U-7 

Basis  for  Entry  in  Cash  Book, 
U-7 

Classification  of,  U-7 

Distinguished  from  Sales  In- 
voices, U-S 

File  for,  U-7,  13 

How  Filled  in,  U-7 

In  Duplicate,  U-7 

Purpose  of,  U-7 

Totaled  Daily,  U-7 

Two  Types,  1^-7 

Used  as  Posting  Mediums, 
U-7 

Used  by  Department  Stores, 
U-7 

Self-Balancing  Ledger 
Need  for  Cash  Account,  7-7 

Selling  Expenses 

Advertising,  25-19 

Analyzed,  29-14 

Changes  in,  29-14 

Decrease  Explained,  29-15 

Delivery  Expenses,  29-14,  19 

Detail  Accounts  for,  25-4,  19 

Differ  from  Factory  Expenses, 
25-4 

Freight  out,  29-14 

Illustrated,  2-5 

Losses  from  Bad  Debts,  25-19 

Salesmen's  Commissions,  29- 
14 

Salesmen's  Traveling  Ex- 
penses, 25-19;  29-14 

Subdivision  of,  25-4 

Selling  Process 

Analyzed,  5-8 

Development  of  Sales  Organ- 
ization, 5-8 

Entering  the  Orders  on  the 
Books,  5-8 

Filling  and  Delivering  Orders, 
5-8 

Getting  the  Orders,  5-8 

Operation  of  the  Sales  Depart- 
ment, 5-8 

Shipping  Memorandum 
How  Used,  U-9 

Shipping  Ticket 
Purpose  of,  U-9 
Shows  Prepaid  Freight,  U-13 

Short  Term  Note 
Illustrated.  11-2 

Sight  Draft 
Attached  to  Bills  of  Lading, 

12-9 
Compared   with   Commercial 
Paper,  i2-10 


Defined,  i2-l 

Distinguished  from  Time 
Draft,  12-1 

Facilitates  Collections,  12-1, 
7,9 

How  Dated,  12-1 

Like  a  Demand  Note,  i2-l 

Not  Recorded  Until  Paid, 
i2-12 

Paid  without  Formal  Accept- 
ance. 12-12 

Single  Entry 

Accountants  Should  Be  Fa- 
miUar  with,  26-2 

Adequate  for  Small  Concerns, 
26-1,  2,  10 

A  Record  of  Personal  Trans- 
actions, 26-1,  4,  5 

Calculation  of  Net  Profit  in, 
26-1,  6 

Changed  to  Double  Entry, 
26-11 

Compared  with  Double  Entry, 
26-10,  13 

Does  not  Furnish  Complete 
Reports,  26-11 

Does  not  Provide  Check  on 
Operations.  26-11 

Does  not  Record  Twofold 
Effect,  26-1 

Essential  Features  of,  26-1,  2 

Financial  Statement,  (Illus- 
trated), 26-6 

Illustrative  Problem,  26-2  to 
7 

Inadequate  for  Large  Busi- 
nesses, 26-11 

Inventory  Method,  26-6 

Journal  (Illustrated),  26-3 

Makes  No  Use  of  Nominal 
Accounts,  26-1 

Method  of  Determining  Pur- 
chases in,  26-10 

Methods  of  Determining  Sales 
in,  26-10 

Methods  of  Changing  to 
Double  Entry,  26-11,  12 

Modified  Forms  of,  26-8 

Preparation  of  Financial 
Statement  in,  26-5,  6 

Primary  Purpose  of,  26-1 

Proof  of  Posting  (Illustrated), 
26-5 

Pure,  26-1 

Reduces  Bookkeeping  Work, 
26-10 

Transactions  Recorded  in, 
26-4 

Used  by  Professional  Firms, 
Hotels,  etc.,  26-1 

With  Cash  Book,  26-8,  9 

Special  Journals 
Advantages  in  Similar  Trans- 
actions, 5-1 
Cash  Journal,  7-1 

Index— Page  33 


Special  Journals— Continued 
Cash     Journal     (Illustrated"), 

7-4,5 
Check  Register  (Illustrated), 

2^-10 
Columnar  Cash  Journal,  10-14 
Columnar  Purchase  Journal, 

10-U 
Columnar  Sales  Journal,  70-14 
Designing  of,  10-6 
Developed     from     Columnar 

Journal,  10-5 
Expanded    with    Controlling 

Accounts,  8-17 
Most    Transactions    Entered 

in,  22-19 
Purchase  Journal,  8-1 
Purchase       Journal       (Illus- 
trated), 8-5 
Sales  Journal,  8-1 
Sales    Journal     (Illustrated), 

8-11 
Save  Time  in  Posting,  5- 10 
Voucher    Register     (Illustra- 
ted), 22-8,  9 

Statement  of  Account 
Information  on,  14-12 
Made    up     from    Accounts, 

U-12 
Notice  to  Customer,  ii-12,  14 
Used    by    Sales    Managers, 

H-12 
When  Made  Out,  1^-12 

Statement  of  Working  Capi- 
tal 
Illustrated,  29-5 
Importance  to  Management, 

29-A 

Statements 

Analysis  of  Financial  State- 
ments, 30-1 

Application  of  Funds  (Illus- 
trated), 29-4 

Balance  Sheet  (Illustrated), 
1-6,7 

Balance  Sheet  for  Lawyers 
(Illustrated).  27-8 

Bank  Reconciliation  (Illus- 
trated), 13-11 

Cash  Statement  for  Lawyers 
(Illustrated),  27-7 

Comparative  Balance  Sheet 
(Illustrated),  29-2 

Comparative  Departmental 
Statement,  29-20 

Comparative  Manufacturing 
Statement,  29-13 

Comparative  Profit  and  Loss 
Statement,  29-12,  16 

Comparative  Statements,  29-1 

Corporation  Balance  Sheet, 
20-15 

Corporation  Manufacturing 
Statement,  20-15 

Page  34— Index 


Corporation  Profit  and  Loss 
Statement,  20-15 

Cumulative  Profit  and  Loss 
Statement,  29-18 

Financial  Statements  in  Single 
Entry,  26-6 

For  Corporations,  20-1,  14 

For  Nontrading  Concerns, 
27-3 

For  Professional  Firms,  27-4 

Incomplete  without  Adjust- 
ments, 16-3 

Joint  Venture  Statement  (Il- 
lustrated), 19-19 

Net  Profit  in  Single  Entrv 
(Illustrated),  26-7 

Manufacturing  Statement, 
25-9 

Profit  and  Loss  (Illustrated), 
2-3,9 

Standardized  Forms  for,  50-1 

Statement  of  Account,  ll-12 

Trial  Balance  (Illustrated), 
5-10,  11 

Static  Ratios 

Accounts  Receivable  to  In- 
ventories, 50-7,  8 

Current  Assets  to  Current 
Liabilities,  50-6,  7 

Defined,  50-6 

Four  Classes  of,  50-6 

Illustrated,  50-6  to  11 

Owned  Capital  to  Noncurrent 
Assets,  50-9 

Serve  as  a  Quantitative  Anal- 
ysis, 50-6 

Total  Debt  to  Owned  Capital, 
50-8,  9 

Use  of,  50-15 

Stock  Certificate  Book 
Record  for  Stock  Certificates, 

20-6 
Resembles  a  Check  Book,  20-6 
Used  in  Corporations.  20-2 

Stock  Certificates 
Evidence  of  Stock  Ownership, 

20-6 
Form  (Illustrated),  20-7 
Kept     in     Stock     Certificate 

Book,  20-6 
Not  Evidences  of  a  Debt,  20- 

13 

Stockholders 
Agreements    in    Reorganiza- 
tions, 21-2 
Appoint  Directors,  20-8 
Claim  on  Cumulative   Divi- 
dends, 20-10 
Common  Stockholders,  20-10 
Dividends  Distributed  to,  20-8 
Do    Not    Have    Rights    of 

Creditors.  20-12 
Informed  thru    Comparative 
Statements,  29-6 


In  Joint  Stock  Companies,  19- 

17 
Interests  Protected,  20^9 
Liability  in  Corporations,  20-2 
May  Sell  or  Transfer  Stock, 

20-2 
Of  No  Par  Value  Stock,  20-9, 

10 
Preferred  Claims  of,  20-10 
Preferred     Compared     with 

Common,  20-10 
Preferred  Stockholders,  20-10 
Receive    Stock    Certificates, 

20-6 
Registered  Holders  of  Stock, 

20-8 
Rights  in  Case  of  Dissolution, 

20-12 

Stock  in  Treasury 
Same  as  Unissued  Stock,  20-10 

Stock-Taking 
See  Inventory 

Stock  Transfer  Book 
Contents  of,  20-8 
Illustrated,  20-8 
Purpose  of,  20-6 
Substitute  for,  20-8 
Used  in  Corporations,  20-2 
When  Closed,  20-8 

Storage  Record 
Auxiliary  Record,  l-J-13 

Store  Room 
Classification  of  Material  in, 

24-4 
Near   Factory   Departments, 

24-4 
Need  for  Bin  Cards  in,  2|-4 
Supervised  by  Stores  Keeper, 

24-4 

Stores  Clerk 
Duties.  8-1 

Storeskeeper 

Compared  to  Cashier,  24-4 

Duties  of,  24-4,  9 

Makes  out  Receiving  Report, 
14-11;  24-6 

May  be  in  Charge  of  Stores 
Ledger,  24-5 

Receives  Purchase  Order,  .S-3 

Responsible  for  Material 
Stores,  24-4 

Uses  Bin  Cards,  24-4 

Uses  Numerical  or  Alpha- 
betical Code,  24-4 

Stores  Ledger 
Account   for   Each   Kind   of 

Material,  24-4 
Approved  Invoices,  Basis  of 

Entries,  24-5 


Stores  Ledger — Continued 

Controlled  by  Raw  Materials 
Accounts,  Si-3,  4,  5 

Entries  for  Material  Received, 
24-7 

Illustrated,  2.'t-5 

In  Charge  of  Storeskeeper, 
U-5 

Kept  by  Accounting  Depart- 
ment, 54-4,  5 

Quantities  and  Money  Values 
Recorded,  24-4 

Stores  Ledger  Clerk  in  Charge, 
2i-5 

Usually  Kept  in  Cost  Depart- 
ment. 24-4: 

Stores  Ledger  Accounts 
For  Each  Kind  of  Material, 

23-11 
Illustrated,  14-11;  24-6 
Information  Recorded  on, 

24-5 
Perpetual   Inventory  of  Ma- 
terials, ^-',-10,  11 
Reconciled  with  Raw  Mater- 
ials Account,  24-5,  6,  11 
Use  of  Columns  in,  24-5 

Stores  Ledger  Clerk 

In  Charge  of  Stores  Ledger, 

24-5 
Records    Material    Received, 

24-8 

Stores  Records 
Form  of  Business  Paper,  J  4-8 
Kept  by  Storeskeeper,  i4-ll 

Subdivision  of  the  Ledger 
Need  for  (Illustrated),  9-1,  2 

Subscribers  Account 
A  Controlling  Account,  20-5 

Subscription  Blanks 
Details  Recorded  on,  20-3 
Purpose  of,  20-3 
Terms  of  Payment  Specified 
on,  20-5 

Subscription  Ledger 

A  Record  of  All  Subscriptions, 
20-3 

A  Subsidiary  Ledger,  20-5 

Controlled  by  Subscribers  Ac- 
count, 20-5 

Necessity  for,  20-5 

Similar  to  Customers  Ledger, 
20-5 

Used  in  Corporations,  20-2 

Subscriptions 

Accounting  Significance  of, 
20-3 

Entered  in  Subscription  Led- 
ger, 20-3,  5 


For  Capital  Stock,  20-3 
Method  of  Securing,  20-3 
Rights  May  be  Forfeited,  20-5 
Secured      bv      Subscription 

Blanks,  20-3 
Similar  to  Accounts  Receiv- 
able, 20-3 

Subscriptions    for     Capital 

Stock 
Four  Methods  of  Receiving, 

20-3,  4,  5 
Recorded  in  Subscription 

Ledger,  20-3,  6 
Recorded  in  Subscription  List, 

20-3 

Subsidiary  Ledgers 

Accoimts  Payable  Ledger,  9-2 
Accounts  Receivable  Ledger, 

9-2 
Affect  Form  of  Journals,  9-4 
Capital  Stock  Ledger,  20-6 
Controlled  by  General  Ledg- 
ers (Illustrated),  9-3 
Cost  Ledger,  24-3 
Creditors  Ledger,  9-2 
Customers  Ledger,  9-2 
Development    of    Customers 

Ledger,  (Illustrated),  9-2 
Finished  Stock  Ledger,  24-3 
For  Expense  Accounts,  9-2 
For  Material  Accounts,  9-2 
For  Personal  Accounts,  9-2 
General  Rules  for  Posting,  9-6 
Have  Statistical  Value,  9-17 
How  Related  to  General  Led- 
ger, 9-17 
Nimierous  Customers  Ledgers 

Needed,  iO-5,  9 
Posting    of   Columnar    Cash 

Book,  iO-12,  13 
Posting  of  Sales  Journal  to, 

9-4,6 
Postings  from  Cash  Journal 

to,  9-5 
Purchase  Ledger,  9-2 
Sales  Ledger,  9-2 
Special  Form  of  Cash  Jour- 
nal for,  9-5 
Stores  Ledger,  24-3,  4 
Subscription  Ledger,  20-5 

Supplies 
Manufacturing,  33-3 
Mill,  25-3 
Office,  16-6 

Surplus 

Analysis  of,  29-3 
Statement  of  Analysis  (Illus- 
trated), 29-3 
Surplus  Account 
Adjusted  for  Depreciation  of 

Previous  Year,  21-4 
Adjusted  for  Investments  of 
No  Value,  21-4 


Adjusted  for  Liabilities  Not 
Yet  on  Books,  2i-4 

Adjusted  for  Shrinkage  in 
Accounts  Receivable,  2i-4 

Adjusted  for  Taxes  of  Pre- 
vious Year,  20-18 

Adjusted  for  Unsalable  Stock, 
21-4 

Adjustment  of,  17-8 

Appropriated  Surplus  in  Bal- 
ance Sheet,  ,20-15 

Charged  with  Loss  on  Sale  of 
Assets,  17-8 

Classified  on  Balance  Sheet, 
20-15,  16 

Surplus  Account 

Credited  for  Bad  Debts  Re- 
covered, 17-11 

Credited  with  Gain  on  Sale  of 
Assets,  17-8 

Distinguished  from  Capital 
Surplus,  20-13 

For  Accumulated  Earnings, 
20-12;  25-16 

Free  Surplus  in  Balance  Sheet 
20-15 

In  Profit  and  Loss  State- 
ment, 20-15 

Profit  and  Loss  Account 
Closed  into,  20-12 

Purpose  of,  20-12;  25-16 

Receives  Current  Profits,  20- 
12;  25-16 

Represents  Part  of  Corpora- 
tion Capital,  20-12 

Reserves,  a  Subdivision  of, 
20-12;  25-16 

Reserves  Thrown  Back  into, 
20-12,  13 

Special  Appropriations  from, 
20-12 

System,  Magazine  of  Business 
Investigations  of  Bad  Debts, 
17-11 

Suspense  Accounts 

For  Estimated  Depreciation, 
17-3.  4 

Terms  of  Sale 
Discount  Policies,  10-13 

Ticket  Auditing  Copy 
Follow-up  Record,  14-9 

Time  Book 

In  Nontrading  Concerns,  27-3 
Statistical  in  Nature,  27-3 

Time  Draft 
Accepted,  12-2 
Defined,  12-1 
Distingtiished     from      Sight 

Draft,  12-1 
Illustrated,  12-2 
Not  Recorded  until  Accepted, 

12-12 

Index — Page  35 


Timekeeper 
Collects  Time  Reports,  24-13 

Time    Saving    Devices    and 
Methods 

Additional  Columns  for  Dis- 
tribution, 10-5 

Cash  Journal  Facilitates  Post- 
ing, 7-1 

Columnar  Cash  Bock,  10-13 

Columnization,  10-1 

Columns  for  Discount  in  Cash 
Book,  10-6,  13 

Controlling  Accounts  for  Lo- 
cating Errors,  9-18,  19 

General  Journal,  5-1 

How  Time  Can  Be  Saved  in 
Posting,  5-10 

Purchase  Journal  Saves  Time 
in  Posting,  8-6 

Purchases  Recorded  for  Each 
Department,  10-6 

Sales  Journal  Saves  Time  in 
Posting,  8-11 

Sales  Recorded  for  Each  De- 
partment 10-6 

Special  Journals,  5-10;  S-1 

Use  of  Special  Colximns  in 
Journal,  10-1 

Voucher  System,  22-1,  2,  21 

Trade  Acceptances 

Accounting  Procedure  for,  12- 
8 

Advantages  of,  12-7 

Common  in  Europe,  12-7 

Compared  with  Accounts  Re- 
ceivable, 12-8 

Defined,  12-7 

Distinguished  from  Accept- 
ance, 12-7 

Entered  in  Special  Account, 
12-8 

Illustrated,  12-8 

Insure  Prompt  Payment, 
12-7 

Preferred  Class  of  Commercial 
Paper,  12-7 

Reasons  for  Using,  12-1 

Separate  Balance  Sheet  Item, 
12-8 

Special  Books  for,  12-8 

Why  kept  Separate  from 
Notes,  12-8 

Trade  Acceptances  Payable 
Book 

Purpose  of,  12-9 
Use  of  Columns,  12-9 

Trade   Acceptances   Receiv- 
able Book 

Purpose  of,  12-8 
Use  of  Columns,  12-8 

Page  36 — Index 


Trade  Receivable 
See  Accounts  Receivable 

Trading 

Accounts  for,  ^5-17 
Defined,  25-17 

In  Classification  of  Accounts, 
25-17 

Trading  Account 
Cost  of  Production   Carried 

into,  23-7 
Debits  and  Credits  in,  ^-8 
How  Debits  and  Credits  are 

Determined,  6-3 
How  Used  in  Manufacturing 

Concerns,  23-7 
Illustrated,  i-7 

Sales  Account  Used  as,  ^-13 
Summary  Account  in  Closing, 

4-6;  23-2;  2^-20 

Trading  Accounts 

A  Record  of  Trading  Activi- 
ties, 25-4 

Defined,  25-17 

In  Manufacturing  Concerns, 
25-4 

In  Profit  and  Loss  Statement, 
25-17 

One  Group  of  Profit  and 
Loss,  25-17 

Two  Elements  in,  25-17 

Two  Groups  in,  25-4 

Trading  Concerns 

Distinguished  from  Manu- 
facturing, 23-1 

Transfer  Agent 

Custodian  of  Stockholders 
Ledger,  20-8 

Disburses  Dividends  for  Cor- 
poration, 20-8 

Duties  of,  20-8 

Keeps  Certificate  Book,  20-8 

Records  Transfers  of  Stock, 
20-8 

Transfer  of  Stock 
Does  Not  Affect  Capital  Stock 

Account,  20-8 
Recorded  by  Transfer  Agent, 

20-8 

Transposition 
Errors  Due  to,  15-4 
How  Discovered,  15-4 

Travelers'  Checks 
By  Whom  Issued,  12-11 
Developed  by  Bankers  Asso- 
ciation, 12-11 
One    Kind    of    Commercial 

Paper,  12-11,  12 
Similar    to    Express    Money 
Order,  12-11 


Treasury  Stock 
Acquired  by  Donation,  20-10 
Acquired  by  Purchase,  20-10 
An  Asset,  20-10 
Defined,  20-10 
Distinguished  from  Unissued, 

20-10 
Has  Voting  Power  When  Sold, 

20-1 
How  Recorded,  20-10 
Sale  of,  20-11 
Valuation  of,  20-11 
Without     Dividend     Rights, 

20-11 
Without  Voting  Power  Whiles 

Held,  20-11 

Treasury  Stock  Account 
Entries  in,  20-10 
Used  in  Corporations,  20-3 

Trial  Balance 
Adjusted  Trial  Balance,  16-8, 

13;  17-12 
Advantage  of  Trial  Balance 

of  Balances,  5-11 
After  Closing,  15-15 
Aids  in  Locating  Errors,  15-1 
Before   Closing,    4-11;    15-3; 

23-5 
Errors  Detected  by,  15-3,  4, 

13 
Errors  in  Setting  up,  15-2,  3 
For  Manufacturing  Concerns, 

23-4 
How    Current    Inventory    is 

Shown,  3-11 
How  to  Make,  5-10 
Illustrated,  5-10;  4-11 
Locating  Differences  in,  15-3,4 
Main  Purposes  of,  5-10,  12 
Not  Affected  by  Subsidiary 

Ledger,  .9-17 
Not   Used   in   Single   Entry, 

26-5 
Of  Balances,  5-11 
Of  Totals,  5-10 
Purpose    of    Trial    Balance 

after  Closing,  4-11,  12 
Problem  Involving  Incorrect 

Trial  Balance,  5-12 
Unadjusted    Trial     Balance, 

(Illustrated),  16-2 

Trial  Balance  Book 
Columnar  Form  of,  14-6 
Form  (Illustrated),  14-6 
What  it  Contains,  14-6,  13 

Turnover 

How  Turnover  of  Stock  is 
Determined,  2-8 

Normal  Turnover,  2-8 

Not  Furnished  by  Single 
Entry,  ^6-10,  11 

Significance  of  Turnover  Fig- 
ures, 2-8;  26-10 


TOPICAL  Problems 

Adjustments  for  Depreciation, 

17-13 
Adjustments  for  Doubtful  Ac- 
counts, 17-13 
Analysis  of  Accounts,  4-1,  18 
Analysis  of  Journal  Entries, 

U-15 
Application  of  Funds  State- 
ment, 29-26 
Architects— Income,  27-18 
Clubs,  Statements  for,  27-18 
Coal  Company,  Car  Record 

Book,  14-15 
Coal   Company — Assets   and 

Liabilities,  1-15 
Coal    Company — Profit    and 

Loss  Statement,  2-15 
Commercial  Paper,  1^-13 
Comparative  Balance  Sheet, 

29-25 
Comparative    Manufacturing 

Statement,  29-27 
Comparative  Profit  and  Loss 

Statement,  29-25 
Corporation,      Goodwill      to 

Stockholders,  21-14 
Corporation,    Capital    Stock 

Issue,  20-17 
Corporation,  Profit  and  Loss 

Statement,  20-18 
Corporation,     Valuation     of 

Goodwill,  21-14 
Creation  of    Imprest    Fund, 

15-16 
Dealer  in  Potatoes,   Closing 

the  Ledger,  4-1,  18 
Correction  of  Capital  Stock 

Account,  20-17,  18 
Dealer    in    Potatoes,    Joint 

Venture.  19-18,  19 
Depreciation  Rate,  Schedule, 

17-13 
Distinction  Between  Capital 
and  Revenue  Expenditures, 
2-14 
Donation  of  Land  by  City, 

20-18 
Drug  Store,  Net  Profit,  2-14 
Dry   Goods   Store,    Working 

Sheet.  16-15,  16 
Estimate  of  Future  Profits, 

29-27 
Branches — Goods    Billed    at 

Cost,  28-3,  8,  26 
Branches — Goods    Billed    at 
Selling  Price,  2S-9, 15,  26,  27 
For  Consignment  Sales,  28-17, 

23,  27,  28 
For  Comparative  Statements, 

29-2  to  23 
Furniture  Company,  Imprest 

System,  15-16 
Furniture    Company,    Trade 

Acceptance,  12-13 
Furniture    House,    Effect    of 
One  Error,  15-1 


Gas  Company,  Income,  27-18 
General  Merchandise,  Retail 

Partnership,  18-17 
General    Trading    Company, 
Classification  of  Accounts, 
5-14 
Grocery  Company,  Reconcil- 
iation Statement,  15-17 
Grocery  Store,  Error  in  Prin- 
ciple, 15-17 
Grocery     Store,      Turnover, 

Gross  Profit,  2-14 
Hardware  Company — Classi- 
fied Balance  Sheet,  1-16 
Hotel,  Income,  27-18 
Illustrating   Abnormal   Busi- 
ness Conditions,  50-15  to  17 
Illustrating     Balance     Sheet 
Analysis,  50-2,  3,  19,  20,  21 
Illustrating  Velocity   Ratios, 
50-11  to  15 

Jewelry  Store,  Net  Operating 
Profit,  2-14 

Lodge,  Cash  Statement,  27-19 

Lumber  Speculation,  Joint 
Venture,  19-21,  22 

Manufacturing  Company, 
Controlling  Accounts,  9-21 

Manufacturing  Company, 
Handling  of  Discounts,  10- 
15 

Manufacturing  Company, 
Insurance  Adjustments,  IS- 
IS 

Manufacturing  Company, 
Use  of  Cost  Sheet,  24-21,  22 

Men's  Retail  Store,  Columnar 
Journals,  10-15 

Mercantile  Company,  Classi- 
fication of  Accoimts,  25-23, 
24 

Mercantile  Company,  Recon- 
ciliation Statement,  15-16, 
17 

Merchant — Change  from  Sin- 
gle to  Double  Entry,  26-15 

Motor  Manufacturing  Com- 
pany, Voucher  System,  22-7 

Motor  Manufacturing  Con- 
cern, Manufacturing  State- 
ment, 25-13  to  16 

Non-Trading  Concerns — In- 
come Accounts,  27-18 

Partnerships,  Capital  Distri- 
butions, 15-1 

Partnerships,  Installment  Di- 
vidends, 19-21 

Physician,  Income,  27-18 

Plow  Manufacturing  Concern, 
Voucher  System,  22-22  to  26 

Posting  of  Petty  Cash  Items, 
15-16 

Produce,  Retail,  Cash  Jour- 
nal, 7-10 

Railroad  Company,  Income, 
27-18 

Real  Estate,  Income,  27-18 


Retail  Clothing  Store— Entry 
for  Original  Investment, 
7-10 

Retail  Dry  Goods  Store,  Bal- 
ance Sheet,  1-2,  3 

Retail  Dry  Goods  Store — 
Special  Journals,  5-18 

Retail  Grocery  Store,  Design- 
ing Books,  10-15 

Retail  Jewelry  Store,  Single 
Entry,  26-14 

Retail  Lumber,  Special  Jour- 
nals, 5-18 

Retirement  of  Assets,  17-13 

Salvation  Army,  Income,  27- 
18 

Silk  Manufacturer,  Correction 
of  Errors,  7-10 

Small  Retail  Business,  Closing 
Nominal  Accounts,  4-17,  18 

Small  Retail  Business,  Incor- 
rect Trial  Balance,  5-12 

Small  Wholesale  Business, 
Multicolumnar  Journal,  10- 
15 

Supply  House,  Failure  to 
Make  Adjustments,  16-1 

Theater,  Income,  27-18 

Three  Party  Draft,  12-13 

Trading  Company — Depart- 
mental Statement,  20-18 

Trading  Company,  Issue  of 
Promissory  Note,  11-23 

Trading  Partnership,  Sale  to 
Corporation,  21-14,  15 

Use  of  Business  Papers,  14-15 

Wholesale  Dry  Goods,  Locat- 
ing Errors,  15-17  to  22 

Wholesale  Shoe  Business,  Led- 
ger Accoimts,  5-14 

Uncollectible  Accounts 

Customers    Account    Closed, 

17-11 
Losses  Charged  Off  Directly, 

17-10 
Losses  Estimated,  17-10 
Losses   to   Be   Provided   for, 

17-1 
Methods  of  Handling  Losses 

on,  17-10 
Periodic     Adjustments     for, 

17-10 

Unexpired  Insurance 

Adjustments  for,  14-1;  16-6,  7 
Distribution  in  Register,  14-I 
Entries  for,  16-6 

Uniform  Classification 
Of  Accoimts,  25-7 

United    Typothetae   of  Am- 
erica 

Classification  of  accounts,  25-7 

Index— Page  37 


Unissued  Stock 
Distinguished  from  Treasury 

Stock,  ^0-10 
Same  as  Stock  in  Treasury, 

^0-10 

Valuation  Accounts 
Defined  and  Illustrated,  ^5-16 
Have  Credit  Balances,  26-16 
Notes  Receivable  Discounted, 

11-7;  25-16 
Not  Liability  Accounts,  25-16 
Related   to   Asset   Accounts, 

25-16 
Reserve  for  Depreciation,  17 A 

Velocity  Ratios 
Based  on  Sales,  50-11 
Defined,  50-6 
Denote  Activity  of  Business, 

50-11 
Illustrated,  50-11  to  15 
Sales  to  Accounts  Receivable, 

50-11,  12 
Sales  to  Inventories,  50-12,  13 
Sales  to  Noncurrent  Assets, 

50-14,  15 
Sales  to  Owned  Capital,  80- 

13,  14 
Use  of,  50-16,  17 

Verification  of  Cash  Balance 
Based  on  Reconciliation  State- 
ment, 25-13 
How  Made,  15-13 

Voucher  Check 

Consists  of  two  parts,  22-2 

Indorsement  on,  22-3 

Recorded  in  Check  Register, 
22-2 

Similar  to  Bank  Check,  22-2 

Without  Voucher  (Illustra- 
ted), 22-19 

With  Voucher  (Illustrated), 
22-3 

Voucher  Clerk 
Duties  of,  22-3 

Voucher  Journal 
See  Voucher  Register 

Voucher  Register 

A  Book  of  Original  Entry, 
22-6 

All  Payables  Entered  in,  22-7 

Basis  for  Entries  in,  22-2,  4 

Blank  Form  for  Solution, 
Insert  in,  22 

Called  Vouchers  Payable  Reg- 
ister, 22-6 

Columns  in,  22-6 

Developed  from  Purchase 
Journal,  8-1;  22-2,  6 

Page  38— Index 


Distributions   in,    22-6 
Entries  Made  in,  22-8,  9;  2^-7 
Form  of,  22-6 
How  Posted,  22-15;  24-7 
Indirect  Labor  in,  24-14 
In  Nontrading  Concerns,  27-9 
In  Reduced  Form,  22-6 
Pages  Totaled  Daily,  22-6 
Record    for   Expenses,    H-9; 

22-1 
Vouchers    Entered    Numeri- 
cally, 22-4 

Vouchers 

Approved  by  Accovmtant,  22-5 

Defined,  22-2 

Detached    before    Check    is 

Deposited,  22-2 
For  Each  Creditor,  22-2 
For  More  Than  One  Invoice, 

22-2 
Form    Without    Attached 

Check   (Illustrated),   22-17 
How  Approved,  22-2 
In  Unpaid  File   Until  Paid, 

22-16 
Invoices  Attached  to  Dupli- 
cate, 22-2 
Listing  the  Unpaid,  22-16 
Method  of  Numbering,  22-6 
New  Vouchers  for  Allowances, 

22-18,  22 
Office  Voucher,  22-3 
Original  of,  22-2 
Part  of  Voucher  Check,  22-2 
Partial  Payments  of,  22-18 
Pay  RoU,  24-14,  15 
Purchases  Recorded  on,  22-2 
Recorded  in  Voucher  Register, 

22-4 
Should  Be  Numbered,  22-4 
Special  Column  for  Payments 

22-7 
Use  of  Triplicate,  22-2 
Uses  Explained,  22-2 

Voucher  System 

Advantages  of,  22-21 
Carbon     Copy    of    Voucher 

Check  (Illustrated),  22-4 
Check  Register  (Illustrated), 

22-10 
Defined,  22-1 
Does   Away   with  Creditors, 

Accounts,  22-2 
Duties  of  Voucher  Clerk,  22-3 
Each  Voucher  Usually  Paid  in 

Full,  22-18 
Effect  on  Cash  Book,  22-6 
Expands    Purchase    Journal, 

22-2 
Form   of   Voucher    Register, 

22-6 


For  Purchase  of  Materials, 
24-7 

How  Operated,  22-11 

How  Payment  Is  Authorized, 
22-2 

How  Started,  22-7 

Illustrative  Problem,  22-7 

Index  of  Creditors'  Vouchers, 
22-16 

Invoices  Must  Be  Approved, 
22-2 

Journal  Voucher  (Illustrated), 
22-20 

Meets  Needs  of  Manufactur- 
ing, 22-1,  21 

Methods  of  Handling  Purchase 
Returns,  22-18 

Objections  to,  22-16,  19 

Operation  of,  22-2 

Partial  Payments,  22-18,  19 

Posting  from  Check  Register, 
22-15 

Posting  from  Voucher  Regis- 
ter, 22-15 

Prevents  Unauthorized  Pay- 
ments, 22-21 

Provides  Distribution  of  All 
Payables,  22-21 

Purpose  of  Paid  File,  22-18 

Reverse  Side  of  Voucher  (Il- 
lustrated), 22-5 

Saves  Time  in  Posting,  22-21 

Transactions  Handled  thru 
22-11,  12,  13,  14,  15 

Time  Saving  Device,  22-1 

Uniform  Method  of  Treating 
All  Payables,  22-21 

Unpaid  Voucher  File,  22-16 

Voucher  Check  Separate  from 
Voucher,  22-19 

Voucher  Check,  (Illustrated), 
22-3 

Voucher  Register,  (Illustra- 
ted), 22-8,  9 

Vouchers  Payable  Account, 
(Illustrated),  22-15 

Voucher  with  Distribution  on 
Face,  (Illustrated),  22-17 

When  to  Be  Abandoned,  22-18 

What  Is  Included  in,  22-2 

Wages 

Accrued,  16-A 

Recorded  in  Voucher  Regis- 
ter, 22-14 

Withdrawals 

By  Partners,  18-2 
Conditions  of,  18-2 
Interest  on,  iS-10 

Working  Capital 

Defined,  50-4 
How  Determined,  50-4 
Major    Factor    of    Balance 
Sheet,  50-2,  4 


Working  Capital— Con't.  An  Aid  in  Making  Adjust-  Preparation  of,  16-8,  9 

Provided    by    Donation    of  ments,  16-8  Reserve  for  Bad  Debts,  17-12 

Stock,  20-U  Balance  Sheet  Set  up  from,  Reserve  for  Depreciation  in. 

Statement,  (Illustrated).  29-5  ^7-8  i7.12 

For   Analysis   of   Cash   and  Reserves  in  Liability  Column, 

Working  Sheet  Income,  (lUustrated),  27-13  ^7.12 

Adjustments  in  16-8-  17-2  ^^^  Determining  Trial  Bal- 

AdianSgS    ki    Noni^ding  a"^^'  ^^"6  Work  In  Process  Account 

Concerns,  27-12, 16  Illustrated,  16-9  See  Goods  in  Process  Account 


Index— Page  39 


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M513322 


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UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

Return  to  desk  from  which  borrowed. 
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r^Tj-c-r-ir   DirniGXiro 

Paire  N 

Mnnth  nf 

19 

Date 

Favor  of 

Remarks 

Voucher 

No. 

CREDITS 

Cash 

Payable 
(debit) 

Discount  on 
Purchases 

Check 
No. 

Amount 

Name 


Address . 


Matriculation  No.. 


Use  these  Blank  Forms 

in  Preparing 

Your  Solutions  for  Assignment  22 


VOUCHER  REGISTl 

2F 

i 

M 

onl 

lof 

19 

Page 

Xo. 

NAME 

Vouth. 
No. 

Credit 

DEBITS                                                                                                                                                                                                                                                ( 

Vouchers 
Payable 

«— 

SELLfNo  Expenses 

AoHIMSTMrilEEXPEhSES                                          | 

General  Ledger                           | 

Dale 

Check 
No. 

5att 

Raw 

MalCTial 

Freight  and 
Cartage 

Direct 
Labor 

Indirect 
Labor 

Factorv 
Supplies 

Repairato 
Macliv  and 
Equipment 

Heal.  Light 
and  Power 

Misc. 
Factory 

lixponse 

Salesmen's 
Salaries 

Travehng 
Expenses 

Advertbing 

Freight  and 
Cartage 
Out 

Misc. 

Office 
Salaries 

Office 
Supphes 

Telephone 

and 
Tt-luirraiih 

.tanonerv 

Ml-..- 
I:<penic» 

Account 

Folio 

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